In the world of real estate, there are always conflicting pressures on the market. If you buy in a reasonably good neighborhood and the price goes up over time, it is possible to sell the house and live off the capital gains. In many instances, the house can be inherited by one of the children of the family and it continues to be lived in and price is not that important till the person moves. In 2008 when the mortgage-backed securities market crashed, we saw house prices fall below their mortgages and people walk away from their homes. It took a few years till investors started buying up the homes and renting them out to stabilize home prices in the area. As a society, we believe home ownership is important, but most politicians do not believe housing is a right, but there should not be too many homeless. The housing market has many contradictions running it.

In an article by Alexandra Stevenson of the New York Times News Service, China has a complicated relationship to real estate. Technically the state or government owns all the property as it is a communist country, however apartments are bought and sold for profit. In China, 30 years ago, the bulk of the population lived in the country, however with the transformation of the economy and jobs in the cities, there was a great migration towards cities and they need a place to live.

This happened for decades and real estate became 1/3 of China’s economic growth. In 2020, the central government cut off easy money that fueled the expansion and this has set off a chain of bankruptcies that shocked a country of homebuyers. At the present time China has 4 million apartments no one wants to buy. There is also 10 million apartments that are in the stage of constructions that may or may not be finished. Billions are owed to builders, painters, real estate agents, small companies and banks around the country.

The biggest developer to go bankrupt was Evergrande, but it was managed carefully and quietly to allow Evergrande to finish many buildings. The issue is China has tens of thousands of smaller developers around the country that are in similar situation.

Dan Wang, chief economist of Hang Seng Bank believes the only way forward is for the state to bail out some mid-size developers in cities where the crisis is more acute.

China’s top leaders are encouraging state-owned companies to buy the apartments and rent them at lower rents or social housing. The senior level government has committed $41.5 billion to help fund the loans. The 4 million apartments is about 4 billion sq ft according to the National Bureau of Statistics.

According to Caixin, a Chinese economic news outlet, the government has tried out more than 300 measures to increase sales and bolster real estate companies. The measures include: cuts to mortgage rates, trade in old apartments and buy new ones, cheap loans to states to buy unsold apartments.

The central bank has committed $14 billion to buy apartments in 8 hard-hit cities, however only $280 million has been used. The states are not using the money for the same reason consumers are not buying, the apartments tend to be in smaller cities and no demand.

Linking to dividend paying stocks, investing in stocks includes investing in the property of the company and the expectation it will go up over the years. Some companies will hold on to property for generations and some of it could be sold off for capital gains. In every profitable company there are short term, medium- and long-term pressures, how it balances them is something worth considering? if not, likely a hedge fund will increase the short term pressures.

There are more questions than answers, till the next time – to raising questions.