Evergrande: the future real estate crisis?

The collapse of Lehman Brothers in 2008 burst a real estate bubble as never seen before, affecting the economies of almost the entire world and creating a credit crisis from which the world has not yet recovered. However, this was not the first case of a real estate bubble, as confirmed by the cases of Japan, Spain and Ireland in the 1990s and early 2000s.

Thirteen years after the biggest financial crisis the world has ever experienced, while some countries have applied more restrictive controls in many states to avoid another credit catastrophe, it seems that others have not learned their lesson. But what is the problem with the Evergrande case and why is it worrying investors around the world? Let’s look at 3 keys to understand why there is talk of a “future real estate crisis”.

Systemic problem, overdue loans and homeowners without a home

In China, the real estate market contributes 30% of the country’s GDP, a figure larger than in the US or the European Union, while wages are still lower than in these countries. To put this in perspective, while in the US the wealth of families by type of asset puts the real estate market at 27%, in the case of China this same asset accounts for 75% of family investment. This means that Chinese families -and companies- are highly vulnerable to any eventuality occurring in this market.

To summarize the causes of the Evergrande case: this conglomerate, the largest in China and one of the largest in the world, owes more than USD $300,000 million, with a plummeting stock market capitalization since February of this year and the inability to match its construction capacity to the commitments assumed with the owners of the homes they sold in plans but have not been able to build due to lack of liquidity and long delays in payment to their suppliers.

It is normal to wonder how it was possible to reach this point in an economy where everything is strongly regulated by the State and the explanation can only be the fact that China has a systemic problem in its economy: ghost cities, too much investment with reduced demand and a great disparity between the price of housing and the average salary of Chinese citizens -who, on average, would take 146 years to pay for a house if they dedicated all their income to it alone.

The future financial crisis and how it will affect us

The bursting of the bubble is inevitable, but it may happen in a more controlled way than the 2008 case in the US: the Chinese government has intervened in the case and is carrying out “piecemeal bailouts” of the commitments made by Evergrande, the risk of people losing the money for the houses they bought but were not built and the loss of the millions of jobs Evergrande generates directly – 200,000 – and indirectly – 3.8 million – will not go under the table.

Likewise, distrust in the real estate market and commodity prices are other problems that are not at all estimable.But the biggest concern is the rise in interest rates on credits and therefore the possible exclusion of SMEs and individuals from access to these, meaning a new setback in the Chinese and world economy.