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China’s Property Crisis Is Rippling Through the Economy

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As a real estate meltdown ripples through the economy, small businesses and workers are owed hundreds of billions of dollars, and new projects have dried up.

Once a beneficiary of China’s property boom, Lan Mingqiang is now an unwitting casualty of its unraveling.

The financial troubles at one real estate company, Country Garden, have left him unable to pay the school fees for his son, who is starting seventh grade. Country Garden owes $21,000 to his company, which makes fences and billboards on construction sites. Now, with Country Garden days away from a default, this money is more out of reach than ever.

“Nowadays, real estate

Mr. Lan is just one in a long line of people waiting to get paid by Chinese property developers. Once the country’s biggest creator of jobs, the housing market also enriched local governments and created a store of household wealth. But a move by regulators to deflate a property bubble and China’s slowing economy have accelerated a crisis that is spreading to all corners of life.

Small businesses and workers who thrived on the decades-long property boom are no longer getting paid. Low on the payback priority list for developers but an important part of the housing ecosystem, the group includes painters, cement makers and builders, as well as real estate agents and companies that furnished sales offices.

As a group, suppliers are waiting on at least $390 billion in payments, according to the research firm Gavekal Research. And that’s a conservative estimate; the number is probably larger.

People want their money and are taking action. Lawsuits and complaints to local authorities are piling up. Construction workers are posting protest banners at empty construction sites that have been chained and locked. “It’s shameful to delay wages,” one sign says. “Country Garden, pay back my hard-earned money,” reads another.

Liu Yaonan, a real estate agent in Guangdong Province, doesn’t have much confidence that Country Garden will ever pay. He has received only three-quarters of his usual commission for the last year and says he is still owed nearly $8,000.

He said he has called Country Garden’s complaint hotline over and over, he said, but the person who answers takes no action other than noting his grievance.

“It is unfair for real estate agencies, because once a developer goes through a debt crisis, the system first protects the buyers,” Mr. Liu said. “Other material dealers, agents and engineers basically cannot get paid.”

The real estate crisis is adding to the strain on China’s economy. Years of lockdowns and other Covid prevention measures have weighed on consumers, who are spending less.Tingshu Wang/Reuters

The flurry of activity is adding to the strain on China’s economy when confidence is already low. Years of lockdowns and other Covid prevention measures have weighed on consumers, who are spending less. Companies have pulled back on hiring. Fewer and fewer people are buying homes.

More than any other company, Country Garden and its sudden reversal of fortunes illustrates the severity of this economic strain. Just a year ago it was China’s biggest real estate firm by sales, and one of the few private companies that suppliers and lenders could depend on to pay the bills.

But a drop in sales over the past six months has pushed it to the edge, and in August it threw up its hands.

Country Garden skipped two small interest payments on bonds, something that has pushed it to the edge of default. If it fails to make those payments by early September, when a grace period ends, it will join a long list of private companies that have defaulted. It also disclosed that it might have lost as much as $7.6 billion over the first six months of the year.

Country Garden’s swing from success to near failure is deepening fears that an abrupt end is in sight for China’s developers, many of which have been under stress for several years as regulators have tried to restrict their bank financing.

At first, some developers were able to keep going, even as they failed to make good on their obligations. They found other ways to compensate suppliers. China Evergrande, the behemoth that defaulted on hundreds of billions of dollars of debt in 2021, repaid some of its suppliers with unfinished apartments instead of cash, on the theory the suppliers could sell them to reclaim the money they were owed.

These days, even bartering is no longer an option.

“Such apartments have run out; we can’t get them,” said Han Tao, a manager at a landscaping company that is owed $1.4 million from property developers. For Mr. Han, apartments wouldn’t have been that useful anyway; no one is buying them right now.

After years of building a thriving business providing cherry trees and acacias for big property projects, he and his colleagues are setting more modest goals. One change: They will accept a job only if cash is paid upfront.

“We keep our business small,” he said.

On China’s social media platform Weibo, construction workers complain about missed paychecks. Some post pictures of court documents from lawsuits. Others show records of the complaints they have lodged with local authorities. Many express a sense of despair and frustration.

Liao Hongmei spent years in a legal battle to try to get $690,000 from China Evergrande. She even won. But Evergrande still hasn’t paid her, and, in her view, businesses the size of hers will probably never get the money they are owed.

“We small suppliers don’t have a say,” said Ms. Liao, who built a successful company a decade ago providing marketing and decoration services to Evergrande for its sales offices in the province of Jiangsu.

Flashy sales offices have long played a key role in bringing in cash that property developers needed to keep growing. Most companies sold apartments before a project was finished, with customers paying upfront.

Inside the sales offices, agents dressed in suits typically pitch potential buyers on the bells and whistles. A miniature model of the residential complex gives a sense of what the complex will look like when it is built. A tour of a model apartment, often decorated lavishly, sells them on a lifestyle.

According to Ms. Liao, sometime around 2016, Evergrande began to issue i.o.u.s — known in dry financial parlance as commercial acceptance bills — for payment within six months. Then, in 2017, it started to give one-year i.o.u.s. The time it took Ms. Liao to get paid got longer and longer. But the money still came in, she said, until the company defaulted on its debt in 2021.

Now Ms. Liao’s business is on the brink of bankruptcy. She sued Evergrande and won, but has no way to get her money because the government is supervising the restructuring of the company, and its first priority has been to make sure Evergrande finishes the apartments it sold. Last year, it said it had finished 300,000 and still had 720,000 more to complete, according to its 2022 results.

On Aug. 17, Evergrande filed for bankruptcy protection and has signaled that it is close to a deal with some of its biggest creditors. Trading in its shares resumed in Hong Kong on Monday, after a 17-month suspension. The stock plunged 79 percent.

But for small-business owners like Ms. Liao, who is at the very back of the long line of banks, creditors and companies seeking money, there isn’t much hope. Many of her peers who have filed similar lawsuits have given up, she said. Ms. Liao said she hoped that once Evergrande finished the apartments it owed home buyers, there would still be something left for people like herself.

“A little money,” Ms. Liao said, is her only request. “But it doesn’t seem like that is going to happen.”

Li You and Zixu Wang contributed to research.

 

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Here are some facts about British Columbia’s housing market

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Housing affordability is a key issue in the provincial election campaign in British Columbia, particularly in major centres.

Here are some statistics about housing in B.C. from the Canada Mortgage and Housing Corporation’s 2024 Rental Market Report, issued in January, and the B.C. Real Estate Association’s August 2024 report.

Average residential home price in B.C.: $938,500

Average price in greater Vancouver (2024 year to date): $1,304,438

Average price in greater Victoria (2024 year to date): $979,103

Average price in the Okanagan (2024 year to date): $748,015

Average two-bedroom purpose-built rental in Vancouver: $2,181

Average two-bedroom purpose-built rental in Victoria: $1,839

Average two-bedroom purpose-built rental in Canada: $1,359

Rental vacancy rate in Vancouver: 0.9 per cent

How much more do new renters in Vancouver pay compared with renters who have occupied their home for at least a year: 27 per cent

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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B.C. voters face atmospheric river with heavy rain, high winds on election day

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VANCOUVER – Voters along the south coast of British Columbia who have not cast their ballots yet will have to contend with heavy rain and high winds from an incoming atmospheric river weather system on election day.

Environment Canada says the weather system will bring prolonged heavy rain to Metro Vancouver, the Sunshine Coast, Fraser Valley, Howe Sound, Whistler and Vancouver Island starting Friday.

The agency says strong winds with gusts up to 80 kilometres an hour will also develop on Saturday — the day thousands are expected to go to the polls across B.C. — in parts of Vancouver Island and Metro Vancouver.

Wednesday was the last day for advance voting, which started on Oct. 10.

More than 180,000 voters cast their votes Wednesday — the most ever on an advance voting day in B.C., beating the record set just days earlier on Oct. 10 of more than 170,000 votes.

Environment Canada says voters in the area of the atmospheric river can expect around 70 millimetres of precipitation generally and up to 100 millimetres along the coastal mountains, while parts of Vancouver Island could see as much as 200 millimetres of rainfall for the weekend.

An atmospheric river system in November 2021 created severe flooding and landslides that at one point severed most rail links between Vancouver’s port and the rest of Canada while inundating communities in the Fraser Valley and B.C. Interior.

This report by The Canadian Press was first published Oct. 17, 2024.

The Canadian Press. All rights reserved.

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No shortage when it comes to B.C. housing policies, as Eby, Rustad offer clear choice

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British Columbia voters face no shortage of policies when it comes to tackling the province’s housing woes in the run-up to Saturday’s election, with a clear choice for the next government’s approach.

David Eby’s New Democrats say the housing market on its own will not deliver the homes people need, while B.C. Conservative Leader John Rustad saysgovernment is part of the problem and B.C. needs to “unleash” the potential of the private sector.

But Andy Yan, director of the City Program at Simon Fraser University, said the “punchline” was that neither would have a hand in regulating interest rates, the “giant X-factor” in housing affordability.

“The one policy that controls it all just happens to be a policy that the province, whoever wins, has absolutely no control over,” said Yan, who made a name for himself scrutinizing B.C.’s chronic affordability problems.

Some metrics have shown those problems easing, with Eby pointing to what he said was a seven per cent drop in rent prices in Vancouver.

But Statistics Canada says 2021 census data shows that 25.5 per cent of B.C. households were paying at least 30 per cent of their income on shelter costs, the worst for any province or territory.

Yan said government had “access to a few levers” aimed at boosting housing affordability, and Eby has been pulling several.

Yet a host of other factors are at play, rates in particular, Yan said.

“This is what makes housing so frustrating, right? It takes time. It takes decades through which solutions and policies play out,” Yan said.

Rustad, meanwhile, is running on a “deregulation” platform.

He has pledged to scrap key NDP housing initiatives, including the speculation and vacancy tax, restrictions on short-term rentals,and legislation aimed at boosting small-scale density in single-family neighbourhoods.

Green Leader Sonia Furstenau, meanwhile, says “commodification” of housing by large investors is a major factor driving up costs, and her party would prioritize people most vulnerable in the housing market.

Yan said it was too soon to fully assess the impact of the NDP government’s housing measures, but there was a risk housing challenges could get worse if certain safeguards were removed, such as policies that preserve existing rental homes.

If interest rates were to drop, spurring a surge of redevelopment, Yan said the new homes with higher rents could wipe the older, cheaper units off the map.

“There is this element of change and redevelopment that needs to occur as a city grows, yet the loss of that stock is part of really, the ongoing challenges,” Yan said.

Given the external forces buffeting the housing market, Yan said the question before voters this month was more about “narrative” than numbers.

“Who do you believe will deliver a better tomorrow?”

Yan said the market has limits, and governments play an important role in providing safeguards for those most vulnerable.

The market “won’t by itself deal with their housing needs,” Yan said, especially given what he described as B.C.’s “30-year deficit of non-market housing.”

IS HOUSING THE ‘GOVERNMENT’S JOB’?

Craig Jones, associate director of the Housing Research Collaborative at the University of British Columbia, echoed Yan, saying people are in “housing distress” and in urgent need of help in the form of social or non-market housing.

“The amount of housing that it’s going to take through straight-up supply to arrive at affordability, it’s more than the system can actually produce,” he said.

Among the three leaders, Yan said it was Furstenau who had focused on the role of the “financialization” of housing, or large investors using housing for profit.

“It really squeezes renters,” he said of the trend. “It captures those units that would ordinarily become affordable and moves (them) into an investment product.”

The Greens’ platform includes a pledge to advocate for federal legislation banning the sale of residential units toreal estate investment trusts, known as REITs.

The party has also proposed a two per cent tax on homes valued at $3 million or higher, while committing $1.5 billion to build 26,000 non-market units each year.

Eby’s NDP government has enacted a suite of policies aimed at speeding up the development and availability of middle-income housing and affordable rentals.

They include the Rental Protection Fund, which Jones described as a “cutting-edge” policy. The $500-million fund enables non-profit organizations to purchase and manage existing rental buildings with the goal of preserving their affordability.

Another flagship NDP housing initiative, dubbed BC Builds, uses $2 billion in government financingto offer low-interest loans for the development of rental buildings on low-cost, underutilized land. Under the program, operators must offer at least 20 per cent of their units at 20 per cent below the market value.

Ravi Kahlon, the NDP candidate for Delta North who serves as Eby’s housing minister,said BC Builds was designed to navigate “huge headwinds” in housing development, including high interest rates, global inflation and the cost of land.

Boosting supply is one piece of the larger housing puzzle, Kahlon said in an interview before the start of the election campaign.

“We also need governments to invest and … come up with innovative programs to be able to get more affordability than the market can deliver,” he said.

The NDP is also pledging to help more middle-class, first-time buyers into the housing market with a plan to finance 40 per cent of the price on certain projects, with the money repayable as a loan and carrying an interest rate of 1.5 per cent. The government’s contribution would have to be repaid upon resale, plus 40 per cent of any increase in value.

The Canadian Press reached out several times requesting a housing-focused interview with Rustad or another Conservative representative, but received no followup.

At a press conference officially launching the Conservatives’ campaign, Rustad said Eby “seems to think that (housing) is government’s job.”

A key element of the Conservatives’ housing plans is a provincial tax exemption dubbed the “Rustad Rebate.” It would start in 2026 with residents able to deduct up to $1,500 per month for rent and mortgage costs, increasing to $3,000 in 2029.

Rustad also wants Ottawa to reintroduce a 1970s federal program that offered tax incentives to spur multi-unit residential building construction.

“It’s critical to bring that back and get the rental stock that we need built,” Rustad said of the so-called MURB program during the recent televised leaders’ debate.

Rustad also wants to axe B.C.’s speculation and vacancy tax, which Eby says has added 20,000 units to the long-term rental market, and repeal rules restricting short-term rentals on platforms such as Airbnb and Vrbo to an operator’s principal residence or one secondary suite.

“(First) of all it was foreigners, and then it was speculators, and then it was vacant properties, and then it was Airbnbs, instead of pointing at the real problem, which is government, and government is getting in the way,” Rustad said during the televised leaders’ debate.

Rustad has also promised to speed up approvals for rezoning and development applications, and to step in if a city fails to meet the six-month target.

Eby’s approach to clearing zoning and regulatory hurdles includes legislation passed last fall that requires municipalities with more than 5,000 residents to allow small-scale, multi-unit housing on lots previously zoned for single family homes.

The New Democrats have also recently announced a series of free, standardized building designs and a plan to fast-track prefabricated homes in the province.

A statement from B.C.’s Housing Ministry said more than 90 per cent of 188 local governments had adopted the New Democrats’ small-scale, multi-unit housing legislation as of last month, while 21 had received extensions allowing more time.

Rustad has pledged to repeal that law too, describing Eby’s approach as “authoritarian.”

The Greens are meanwhile pledging to spend $650 million in annual infrastructure funding for communities, increase subsidies for elderly renters, and bring in vacancy control measures to prevent landlords from drastically raising rents for new tenants.

Yan likened the Oct. 19 election to a “referendum about the course that David Eby has set” for housing, with Rustad “offering a completely different direction.”

Regardless of which party and leader emerges victorious, Yan said B.C.’s next government will be working against the clock, as well as cost pressures.

Yan said failing to deliver affordable homes for everyone, particularly people living on B.C. streets and young, working families, came at a cost to the whole province.

“It diminishes us as a society, but then also as an economy.”

This report by The Canadian Press was first published Oct. 17, 2024.

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