The Evergrande crisis: 4 questions that explain why China’s property market, which is twice as big as America’s and where 20% of homes are empty, matters

• Evergrande, China’s embattled real-estate giant, is on the brink of bankruptcy.
• It has 1.6 million undelivered apartments and is more than $300 billion in debt, making it the most indebted company in the world.
• A bankruptcy could be disastrous for Chinese homeowners, who hold 70% of their wealth in real estate.
• See more stories on Insider’s business page.

Evergrande, the second-biggest real-estate developer in China, has been dominating headlines for weeks. The company has more than $300 billion in debt, making it the most indebted company in the world. It also has 1.6 million undelivered apartments hanging in the balance.

The global conversation around Evergrande has turned to a series of big questions, including whether China’s central government will bail out the giant, and what Evergrande’s long-term impact on the real-estate sector will be.

While analysts are now overwhelmingly predicting Beijing will not bail out Evergrande, Dr. Xin Sun, a senior lecturer in Chinese and East Asian Business at King’s College London, told Insider the long-term impact on the housing market and the entire economy is still highly uncertain.

“What we see at the moment is that people are losing their previously very strong confidence in the real estate sector,” Sun said. “A main concern of the central government is trying to limit the contagion effect of an Evergrande collapse – if it collapses – from spreading to other developers.”

We’ve answered a few questions on China’s housing market to help you understand the backdrop against which the unfolding Evergrande crisis is set.

How big is China’s real estate market?

China’s real-estate sector is huge. According to Goldman Sachs Group Inc., the total value of the market hit $52 trillion in 2019 – twice the size of the US residential housing market, The Wall Street Journal reported. The sector accounts for 29% of China’s gross domestic product (GDP). And its cities are growing rapidly: In 2019, China recorded a 60% urbanization rate.

But a lot of that real estate is empty. An estimated 65 million homes – 20% of the total supply – in China are unoccupied. Not only is this high by international standards, it means there are enough empty houses in China to house the entire population of France.

Homeownership rates in the country are also high. More than 90% of households in China are homeowners, according to a January research paper on homeownership in China from the National Center for Biotechnology Information. The US, for comparison, has a 65% homeownership rate.

“Over the past two or three decades, the price of Chinese real estate has gone up,” Sun said. “This has generated a popular belief in China that real estate is always safe to invest in.”

How much do homes in China cost relative to income?

The average cost of a home varies vastly depending on the region and city.

In China’s tier-one cities – like Beijing, Shanghai, and Shenzhen – housing costs around 14 times as much as the average salary, a 2020 report from the Lincoln Institute of Land Policy found. In tier-two cities, homes cost roughly seven times the average salary, the report shows. And in tier three, four, and five cities, home prices are about five times as high as the average salary.

In some tier one cities, home prices per square meter are on par with what you would find in some of the world’s most expensive cities, per a WSJ report that compared prices in China’s Tianjin and London.

How much debt does an average borrower in China get exposed to in order to buy a home?

Household exposure to debt is lower in China than in many other developed countries, but it still forms a significant part of their portfolio.

“The debt level is lower in China than what you would see in other countries, for example, Thailand or Malaysia,” Bernard Aw, an economist overseeing Asia Pacific for Coface, told Insider. “Chinese citizens have high savings rates – about 40% of their money goes into savings.”

They also tend to employ personal lending networks in order to purchase homes. At least 40% of China’s millennial homeowners received money from their families to help pay for their houses, a 2017 HSBC survey on millennials found.

That said, the majority of debt in Chinese households is property-based, Aw said, and household debt has been on the rise since the financial crisis. In 2020, household debt rose to 128% of income, according to a report from China-focused researcher Rhodium Group. At the end of 2018, housing-related debt accounted for nearly two-thirds of the average household’s total debt, according to a 2019 report from the International Monetary Fund.

Individual wealth in China is also heavily tied to real estate.

According to Moody’s estimates, 70-80% of Chinese household assets are tied to real estate, CNBC reported in August.

That’s more individual wealth tied to real estate than in just about any other developed country, Sun said: “In the west, people diversify their investments and the majority goes to capital markets.” But in China, where the capital markets are less developed and highly volatile, people keep much more of their money invested in real estate.

Household spending on real estate is also high, Aw said: “Some 30-40% of household spending is going into the real estate sector, be that rental payment or mortgages, for example.” This percentage is similar to how much Americans spend on housing.

How is China planning to deal with its real estate debt?

Beijing is already pressuring government-affiliated developers to buy up Evergrande’s assets, Reuters reported. On Wednesday, for example, it announced it would sell off $1.5 billion of its stake in Shengjing Bank to an investment company that manages Chinese state assets.

But when it comes to controlling the fallout around Evergrande’s debts, both Sun and Aw said the government’s first priority is the consumer.

The government “is quite anxious about what this Evergrande crisis means for the average consumer or the homeowners,” Aw said, particularly because so much of the average consumer’s wealth is tied up in their real estate.

“It’s also why some of the measures taken by the government so far are geared towards helping the consumer first,” he added.

“The priority for the government in managing defaults or bankruptcies is to ensure social stability and negotiate a deal with creditors,” Sun said. He outlined three levels of priority for the government: homebuyers first, creditors second, and existing shareholders last.

“If you look at the collapse of major companies in China, that’s always how the collapse is managed,” Sun added.