Is China Reliving the US Housing Crisis in 2008?

China markets are roiled by a property crisis once again.

Two years ago it was Evergrande. Now it is Country Garden.

Instinctively, we seek to draw from history, searching for comparable instances that could help us understand this issue better. The freshest recollection directs our attention to the US subprime mortgage crisis, which precipitated the 2008 economic downturn.

As we were trying to find parallels between these events, we ended up finding dissimilarities.

We had trouble recalling prominent real estate developers in the United States. In contrast, there were plenty of big name developers in China, Hong Kong, and even Singapore.

Here's the list of ten wealthiest individuals in the real estate industry according to Forbes:

1. Lee Shau Kee (Henderson Land, Hong Kong)

2. Donald Bren (Irvine Company, US)

3. Harry Triguboff (Meriton, Australia)

4. Peter Woo (Wheelock, The Wharf, Hong Kong)

5. Joseph Lau (Chinese Estates, Hong Kong)

6. Kwong Siu-hing (Sun Hung Kai Properties, Hong Kong)

7. Kushal Pal Singh (DLF, India)

8. Manuel Villar (Vista Land & Lifescapes, Philippines)

9. Stephen Ross (The Related Company, US)

10. Alexander Otto (Otto, Germany)

Evidently, the list is predominantly composed of six Asian figures, with Hong Kong contributing four of them. The two American enterprises mentioned are privately held, making them less recognizable to stock investors.

It's noteworthy that despite the United States boasting a significantly larger economy, its real estate developers do not surpass their Asian counterparts in terms of wealth. This implies that the pricing and demand for residential properties in the US might not be as lucrative as in Asia.

Statistics show that approximately 66% of Americans are homeowners, whereas the homeownership rate in China exceeds 90%.

Another point worth noting is that in the United States, there is a preference for residing in suburban areas in detached, single-family homes, with commuting to urban centers for work being the norm. Following the onset of the post-Covid era, there is an increased inclination towards remote work.

A significant portion of residential properties in the US consists of such single-family homes, and these are not typically the products of large real estate developers. Instead, they are more often constructed by smaller developers, independent architectural firms, and home builders.

In contrast, the Chinese populace leans towards a preference for comprehensive facilities and amenities, along with a desire for urban living environments. This preference has led to developers acquiring costly plots of land and erecting tall structures to maximize the number of housing units.

For these ambitious endeavors, real estate developers require substantial capital, leading them to be of larger scale compared to their American counterparts. Consequently, the Chinese residential property market is more prone to the emergence of a property bubble, as opposed to the situation in the United States.

Next, a notable distinction is that the 2008 predicament didn't stem from the developers themselves encountering defaults; rather, it was the banks that had extended loans to individuals for home purchases.

The issue primarily resided within the banking sector rather than being solely a real estate concern. These banks had lent to individuals with lousy credit scores, subsequently bundling these loans into securities that were misleadingly categorized as low-risk. This deceptive setup ultimately led to the downfall of institutions such as Lehman Brothers and Bear Stearns.

Drawing a comparison, current reports indicate that China's banks have approximately a quarter of their outstanding loans linked to the property sector. To provide context, Lehman Brothers had amplified its real estate investments, with holdings reaching a staggering 30 times its capital. By contrast, the exposure of Chinese banks appears more manageable, and the central bank should have the capacity to handle them should problems worsen.

Nonetheless, China has a problem with its shadow banking - refers to underground financial activity that takes place outside of traditional banking regulations and systems.

Just last Friday, Zhongrong International Trust, which had invested in real estate projects during 2022, defaulted on payments to its investors. The true extent of the ensuing ripple effect remains uncertain and we believe such signs of contagion is what drove down the China stock markets in recent days.

Given these circumstances, it is prudent to avoid in any dealings involving real estate developers, encompassing bonds, stocks, and particularly shadow banking entities.

This issue was identified a considerable time ago, prompting the government's determination to address the matter. As the years progressed, regulations governing both the property sector and shadow banking grew stricter, but perhaps the bubble is too big to have a soft landing. The problems that China is facing today is different to that of the US in the 2008 housing crisis, but the magnitude could possibly be similar.