By John Plassard, senior investment specialist at Mirabaud Group
When people talk about property crises, many episodes come to mind: unbridled property speculation at the 1873 World Exhibition, the Swiss property crisis and the subprime crisis. What’s really interesting (or frightening) is that these kinds of crises don’t behave at all like stock market crises.
The facts
New house prices in 70 Chinese cities fell by 4.9% year-on-year in July 2024, following a 4.5% fall the previous month. This is the 13th consecutive month of decline and the fastest pace since June 2015, despite Beijing’s continued attempts to mitigate the impact of prolonged property weakness, including by reducing mortgage rates and home purchase costs.
On a monthly basis, new house prices fell by 0.7% for the third consecutive month in July, remaining at their sharpest decline since October 2014. Prior to this, the Evergrande property group raised the alarm in 2021 following extensive and poorly controlled development. It was then revealed that the company had accumulated a debt estimated in 2023 at nearly 2,400 billion yuan, or more than 302 billion euros.
These are just a few examples of the property crisis that has rocked China for several years now. However, there have been other property crises in several parts of the world in recent decades, so we can take a step back and try to anticipate when the second economy will bounce back.
Specific examples
There are several examples of property crises around the world as well as of “returns to normality”. Here’s what we’ve observed:
Switzerland
The Swiss property crisis of the early 1990s was triggered by a speculative bubble in the property markets at the end of the 1980s, fuelled by overvaluation and easy credit. The Swiss National Bank’s high interest rates, designed to control inflation, made borrowing expensive, leading to financial stress for over-indebted property owners and developers.
The economic slowdown of the early 1990s, marked by rising unemployment and falling consumer confidence, caused demand for real estate to plummet. Swiss banks, which were heavily exposed to property, suffered heavy losses, exacerbating the crisis. The result was a sharp fall in property prices, a credit crunch and a prolonged market correction. It was not until 2000 that the market returned to its former levels.
Great Britain
In 2008, the UK property market collapsed. The global financial crisis, triggered by the sub-prime mortgage crisis in the US, led to a sudden and severe tightening of credit conditions. Banks stopped lending freely and people found it harder to get mortgages. This led to a sharp fall in house prices, as buyers dried up and sellers found it harder to offload their properties. At the height of the crisis, the UK property market fell by around 20%.
It took until August 2014, almost 7 years, for house prices to return to their pre-crisis levels (unadjusted for inflation).
United States
The collapse of the housing market in 2008 was caused by various factors, including sub-prime mortgages, predatory lending practices and securitisation by lenders. The collapse of the housing market in 2008 had a devastating impact on the global economy. Millions of people lost their jobs and many businesses went bankrupt. The US government had to intervene with a massive bailout of the financial system to avoid a depression.
The property crash of 2008 was a catastrophic event in the history of the US housing market, leading to a severe economic recession that affected millions of Americans.
The recovery of the US housing market from the 2008 financial crisis took several years, with the timing varying by region and market segment. Generally, the housing market began to stabilise around 2012, when house prices started to rise steadily.
In 2013, many regions saw significant improvements, with house prices nationally up around 10%-12% on their post-crisis lows. However, it was not until 2016-2017 that house prices in many parts of the country returned to pre-crisis levels, marking a full recovery. Some regions, particularly those hardest hit by the crisis, such as parts of Florida, Nevada and Arizona, took longer to recover.
The recovery was influenced by factors such as government intervention, economic growth and the gradual improvement in access to credit.
The importance of China
China is currently experiencing a property crisis, and this is a major problem, because the Chinese property market is very large. It is the world’s largest asset class. According to some estimates, China’s property market is worth some $60 trillion dollars.
But in recent years, this figure has been falling. And it is Chinese property developers who are currently experiencing the most obvious difficulties. They have started to miss loan payments, or even to go into default.
It is very important to pay attention to this, because China is a massive part of the global economy. Changes in China’s health is therefore having an impact on ordinary people and investors, even in the United States, for example, in terms of their pensions and savings. Property has helped China enormously in the past, but it could also hold its economy back in the future.
Chronology of a Chinese story
China’s property crisis has dragged on for several years, with developers facing serious financial difficulties, including payment defaults. Timeline:
- Phase 1: Birth of the property market: Before the 1980s, private property did not exist in China. Economic reforms allowed private companies to develop, but the government saw its revenues dwindle. In 1994, Zhu Rongji’s tax reforms led local governments to rely on land sales to generate revenue, which led to massive property development.
- Phase 2: The “party” years: China’s property market boomed, with local governments, developers and citizens investing massively in real estate. Developers such as Evergrande expanded massively using debt. This period was marked by extreme growth, wealth creation and unbridled speculation in the property market.
- Phase 3: The crisis: The crisis began with President Xi Jinping’s 2017 speech criticising speculation in the housing market, followed by the 2020 “three red lines” policy, which imposed strict limits on developer debt. This led to a slowdown in the market, with property prices falling and developers such as Evergrande defaulting. The situation now represents a major risk for the Chinese economy, with potential financial damage on a massive scale.
A “simple” cycle story?
The question now is how long this crisis could last. A property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global property markets, usually following a land boom.
A land boom is a rapid increase in the market price of real estate, such as housing, until it reaches unsustainable levels and then falls.
The question of whether property bubbles can be identified and prevented, and whether they have a wider macroeconomic significance, is answered differently by different schools of economic thought.
Bubbles in the housing markets are more critical than bubbles in the stock markets. Historically, stock market collapses occur on average every 13 years and last 2.5 years. Housing price collapses are less frequent, but last almost twice as long and result in twice as much lost production.
According to IMF studies, house price falls occur on average every 20 years, last around 4 years and result in price falls of around 30%. While only a quarter of share price rises were followed by falls, around 40% of house price rises ended in falls. The two types of collapse were highly synchronised between countries.
The falls in equity and housing prices have both been associated with output losses (compared with the simple extrapolation of the pre-crisis growth rate), reflecting falls in the growth rates of all the main components of private final domestic demand: consumption, investment in machinery and equipment, and investment in construction.
The loss of output associated with a typical collapse in house prices (around 8% of GDP) was twice as great as that associated with a typical collapse in share prices (around 4% of GDP).
Output generally starts to recover around nine quarters after the start of a fall in equity or house prices.
Another experimental study also shows that, compared with financial markets, property markets experience longer periods of expansion and recession. Prices fall more slowly because the property market is less liquid.
When will China’s property crisis end?
That, of course, is the multi-billion-dollar question. But let’s face it, it’s impossible to give an exact answer to this question. However, looking at history (which includes the examples above) we can highlight several elements.
The average duration of a property crisis is around four years. This figure comes from International Monetary Fund (IMF) studies, which show that house price falls occur on average every 20 years, with an average decline of around 30%. However, property crises generally last longer and result in greater economic losses than stock market crises. For example, the Swiss property crisis lasted around 10 years, while the recovery of the US property market after the subprime crisis took around 8 to 9 years.
Property crises can also lead to prolonged recessions, with lasting impacts on the global economy. The length of the recovery depends on many factors, including political intervention and regional dynamics.
If we focus on the Chinese property crisis, we can make the following observations:
- The property crisis began in 2017, 7 years ago.
- Since then, house prices have fallen by 10% to 20% depending on the region.
- The Chinese government is increasingly intervening in the markets to prevent the crisis from having a dramatic impact on the country’s economy. In particular, it has lifted the floor on mortgage rates and encouraged local governments to buy up houses and convert them into affordable housing.
On the basis of these factors, we can conclude that the Chinese property crisis has lasted longer than the historical average. Secondly, while average prices have fallen, there is “still room” for the trend to continue somewhat. Finally, political intervention has been very significant and will continue over the coming months. We can therefore assume (hope) that the crisis will soon be “over” and that 2025 could mark the year of the rebound…
Summary
The crisis in the Chinese property market is a crucial issue with global implications. The country’s efforts to deflate the market without causing widespread economic damage are proving difficult. If China fails to stabilise the situation, the economic consequences could be severe, affecting not only China but the global economy as well. However, in the light of previous global property crises, there is reason to hope that the worst is behind us…
