China's Real Estate Crisis Echoes Lessons from US Housing Market Crash

The specter of the 2008 US housing market crash looms large as China confronts its own real estate downturn.

by Faruk Imamovic
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China's Real Estate Crisis Echoes Lessons from US Housing Market Crash
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The specter of the 2008 US housing market crash looms large as China confronts its own real estate downturn. The parallels between the two crises are striking, offering both cautionary tales and potential pathways for Beijing as it seeks to stabilize its economy.

As the International Monetary Fund flags China's property market decline as historic, the lessons from the United States' experience become increasingly pertinent.

China's Real Estate Downturn: A Mirror to the Past

Goldman Sachs analysts, in a recent note, highlighted the protracted nature of housing market recoveries, drawing on the US subprime mortgage crisis as a precedent.

Since the third quarter of 2021, China has witnessed a significant 16% decline in real house prices. Goldman Sachs posits that, if the US's ordeal serves as any guide, China might only be halfway through its housing price correction.

This comparison is particularly alarming given the scale of "expensiveness" in China's real estate, surpassing the conditions faced by the US in 2006. With housing starts and new home sales plummeting by 64% and 52% respectively, the absence of a visible bottom to this downturn spells a challenging road ahead for China's economic recovery.

Policy Responses and the Road Ahead

The critical distinction between the US and Chinese crises lies in their underlying causes. While the US debacle was precipitated by lax mortgage lending standards, China's predicament stems from its unique land supply mechanism, leading to inflated house prices and subsequent economic distortions.

This difference underscores the necessity for Beijing to adopt fiscal solutions aimed at rectifying these foundational issues. Moreover, Goldman Sachs underscores the importance of Beijing implementing robust policy measures to mitigate potential spillover effects.

The US crisis's escalation was exacerbated by collateralized debt obligations, which magnified the repercussions of mortgage defaults. To avert a similar fate, decisive actions to support local governments, banks, and the delivery of pre-sold homes are imperative for China.

The stakes for Beijing are high, as the failure to address the real estate crisis effectively could result in prolonged economic damage. The lessons from the US highlight the necessity of containment strategies to prevent broader financial sector contagion.

China
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