The rotten tail of China’s property bust

A decade ago, China was in the midst of a property boom. In Zhoukou, a rapidly urbanizing city in the country’s central plains, a property developer started a residential complex that promised “classic Chinese living,” full of greenery and next to good schools. Today, most of its high-rises and villas are concrete skeletons. The developer, Henan Zhongao Plaza, is bankrupt and its boss is in jail. A handful of hardy residents have moved into a few buildings, but nearby apartments remain empty; some even miss their windows.

Welcome to a lanweilou, or a “rotten tail” building, a term that captures the idea of ​​hopeful beginnings that end badly. Chaguan recently visited the Henan Zhongao development and walked up dim stairs to see how China’s property crash is playing out – and specifically how it’s affecting those who bought into the good life and ended up far from it.

“Of course we were optimistic. We thought there would be a lot of activity here,” said Mr Guo, a middle-aged resident. “I’m someone who likes silence, but this is too quiet,” laughs Ms. Li, his wife. Given how deserted the compound is, whoever gets home first calls the other to report that they are safely back inside. At least they could move in. In some cases, Ms. Li notes sadly, older homebuyers died before they got their keys.

Similar fates have swept across China. Developers used to sell houses before construction to raise funds. When the real estate market tumbled five years ago, their financing dried up. According to Nomura, a bank, China had about 20 million pre-sold, unfinished properties as of 2023. Chaguan’s back-of-the-envelope calculation, based on average prices, is that a staggering 17 trillion yuan ($2.5 trillion) of household wealth is tied up in this little more than 10% of the useless projects. This is a major drag on the economy. But officials seem confident that, given enough time, they can bring the lanweilou to completion. Their inexplicable plan is to spread the cost as widely as possible and extinguish any embers of discontent.

The choice to live in a lanweilou is quite unusual. In some extreme cases, desperate home buyers moved in before water and electricity were connected. In the Henan Zhongao development aid programs have already been linked. But residents sometimes refuse to pay maintenance fees. The property management firm, in turn, is striking back. “The other day they just stopped the lift,” says Ms Li. Eventually, the couple wants to move to a better home. But they know that they will probably be stuck in Henan Zhongao for years. “There is not even a way to measure our house’s value. No one will ever want to buy it,” says Mr Guo.

Slowly the government is chipping away at the problem. In 2022, it introduced a baojiao lou, or “guaranteed delivery,” program. Officials created a whitelist of presold, unfinished developments and then used a mix of incentives and pressure to get banks to extend credit to complete construction. In total, Chinese banks have already approved more than 7 trillion yuan in loans for white-listed properties (although many have been for debt transfers, not new funding).

At Henan Zhongao, there are glimmers of hope. What used to be the showroom now functions as a debt restructuring office. A representative of the former developer sits next to a wood stove for warmth. His focus is on organizing papers that document who bought which apartments. His team is working with the government to bring in new investors. “It’s almost all in place, and we’ll probably start construction again later this year,” he says.

Many people will be grateful to get the homes they have been waiting for so long. Generally, they continued to make mortgage payments – default was the alternative. A small number dared to stage public protests, though officials quickly cracked down on them. Still, the prospect of completion has a bitter twist for some buyers. They will end up delivering homes that are worth far less—in some cases as much as 50% less—than they paid. If the construction is never finished, they can at least have a chance to walk away from their mortgages

No refunds

In Zhengzhou, about 200 km (120 miles) from Zhoukou, one couple briefly became famous for posting videos online about their fight over a pre-sold house. Zhang Yiliang and Dong Lijun filed lawsuits to recover their investment. But the court ruled against them, ruling that the housing project was close to completion. Chaguan visited the site. It is indeed almost ready for residents and looks quite attractive, albeit in the far outskirts. On February 8, Mr. Zhang and Ms. Dong released another video, via backup social media accounts (their main ones were disabled). They don’t want their apartment. They want their money back. “Give us back our peaceful life,” pleaded Mr Zhang. “We don’t have to clean up your mess anymore.”

If the couple prevailed, they would get their down payment back and escape an underwater mortgage. They were able to buy a new place for much less than their original property. But imagine the ongoing consequences for the government. There would be millions more just like them. It would cost far too much to compensate them all, and it would ensure that many lanweilou remain unfinished forever. The only real option, as far as the government is concerned, is to plod along with “guaranteed delivery.”

In the Henan Zhongao project office, the manager working to get that development back on track sums it up best. “Ordinary people bear the cost. That’s the only way to do it,” he says. There will be no bailout for developers nor for homebuyers. Instead, officials want to spread losses across the country. When the real estate sector boomed, everyone seemed to benefit. On the downside, it is a collective reckoning.

Subscribers can subscribe to Drum towerour new weekly newsletter, to understand what the world makes of China—and what China makes of the world.