Jenna Teterin, Stanford University
2008 and 2009. Mortgage defaults, foreclosures, bank bailouts. Fannie Mae and Freddie Mac.
These are all words and phrases that come to mind when talking about the housing crisis. The collapse of financial institutions caused by subprime mortgage rates in 2008 and 2009 was felt by the entire United States; more acutely by the over six million American households that lost their homes.
But there’s a new housing crisis looming—just not in the United States. The Evergrande Crisis, eponymously named after the Chinese property giant, has introduced a new epidemic of individual and public real estate catastrophes. Evergrande, one of the largest real estate companies in China, aggressively expanded by borrowing more than $300 billion—growth that was put to a halt by recent laws surrounding the maximum debt owed by major real estate developers. To stay afloat, Evergrande sold property at extreme discounts, leading them to default on interest payments. The countless Chinese individuals who invested the down payment of their apartment pre-construction may now never see their homes built, with limited hope of financial compensation. The response? Nation-wide mortgage revolts threatening the Chinese bank.
Unlike the United States, which took three and a half years to begin recovering from its 2008 crisis, China already revealed a sixteen-point plan to respond to the crisis that started just last year. Major points of the plan include property development loans for developers, relaxing of restrictions and increased extensions for mortgages and credit scores, easing a major restriction on banks’ property lending, and special loans for project completion. It’s not meant to bail out Evergrande and obscure its responsibility for the crisis. Rather, the plan is attempting to incentivize the company to finish the projects it has planned or started, giving citizens the housing they were promised.
More importantly, it’s working. Immediately after the announcement of this plan, Hong Kong-listed Chinese developers jumped, on average, eleven percent. Dexin China, a major Hangzhou-based developer, saw its shares soar by 151%. Longfor Properties, another top real estate developer, surged seventeen percent. Others, such as Agile and China Vanke, jumped between eight and fourteen percent. It’s not just Hong Kong or these major players, either. China’s CSI 300 Real Estate Index (.CSI000952) ended up rising 9.4% right after the announcement, making this its “biggest daily jump ever.”
It remains to be seen whether this is a true reflection of the market or just opportunistic sentiments following a large-scale government initiative. But what it does show is the immediate response by a quick-moving government that places the needs of its people above its financial institutions—a response the United States should be keen to pay attention to.
That’s not to say that the housing crises are exactly the same. This one was caused by internal corporate failure and a general disregard for its fiduciary duties to its customers, while the American one was caused by a lack of provisions and checks within the financial system. However, the root causes remain eerily similar: companies employing extremely risky financial strategies, whether that be Ponzi-like property development or low-rate, copious lending, until the market crashes and their tactics are exposed.
So what is there to learn from the recent Chinese housing crisis? First, they are often unavoidable. But second, the immediate government response matters. Not just in assuring its people that “things will improve,” or berating the institutions at fault—rather, in creating and publicizing pointed, detailed plans for recovery. The market reflects people’s beliefs. It’s the government’s job to make them believe.