In its financial stability report in November, the Fed pointed out that its business contacts began to focus on the impact from the Chinese market. Nearly half of the Fed's business contacts have raised the possibility of impact on China's real estate market in the next 12 to 18 months. All this anxiety is related to the failure of a Chinese real estate enterprise to honor the US dollar bonds issued abroad as scheduled. Market mentality is always generally linked by individual risk events.
This concern is understandable. China has a huge real estate market. Sales of new homes totaled 15.5 trillion yuan ($2.2 trillion) last year, seven times that of new homes in the United States last year. China's real estate market is connected to the global market through raw material imports and developer financing.
China's housing market is growing very rapidly. From 2011 to 2020, the sales increased more than twice. In these nine years, the sales area increased by 60% and the price doubled. The market has experienced a series of stop and go cycles, partly because of its rapid growth. The decline in 2008 and 2011-2012 was mainly caused by policies. The government tightened the house purchase policy to control the price rise and improve people's affordability. In contrast, the decline from 2014 to 2015 was mainly driven by market factors, including a significant increase in inventories, slowing economic growth and financial innovation that provides families with a wider range of investment opportunities.
The current cycle is also caused by policies, but this time the government is trying to control financial risks, not housing prices. The business model of Chinese real estate developers involves buying land and building apartments through large loans, which usually takes three years to complete. With the rapid growth of the market, developers have become heavily indebted.
