- China's property troubles may slow the economy down, Nicholas Lardy, a China economy expert, told CNN.
- However, the issues will not create a financial crisis, he added.
- There may even be a bright spot. The over-capacity in the property market could be absorbed in the years ahead, he said.
The financial markets have been sounding alarm bells on China's dismal post-pandemic growth, pointing to flagging investor confidence in the world's second-largest economy.
And a dark cloud is looming over the Chinese real estate sector.
Even so, one Chinese economy expert thinks the crisis is unlikely to spill over into the broader economy.
"It will slow the economy down, but it's not going to create a financial crisis," Nicholas Lardy of the Peterson Institute for International Economics told CNN in a Tuesday interview.
China's property sector has been gripped in a crisis since 2021 when property giant Evergrande ran into a liquidity crisis.
The crisis came to a boiling point this summer when other Chinese real-estate developers ran into similar issues, and the sector started to default on its bond payments. The cash crunch also slowed down home construction, prompting some buyers who pre-paid for apartments to refuse to repay their mortgages.
There are now fears China's property troubles could spill into the broader domestic economy and the international markets.
Lardy told CNN that many large Chinese property companies have missed payments on their bonds, and there could be more troubles ahead, but he doesn't think the crisis will spiral out of control.
"When you buy a flat in China, you have to come up with a pretty big down payment, so most owners have quite a bit of equity," Lardy, who is considered a leading scholar in the Chinese economy, said. "So, if the price goes down a little bit, they're not going to send the keys back to the bank."
The average downpayment for first-time buyers is 24% of the property price.
All mortgages in China are also full-recourse loans, which means lenders can seize a borrower's other assets should they stop repaying the housing loan. "So defaults on property are extremely low, and they're likely to remain low even if prices fall further," Lardy added to CNN.
While sales and real-estate investments are also down, the slowdown can also be viewed positively, because China has been overbuilding for several years, Lardy added.
China saw a decades-long boom in its real-estate sector before the current crisis hit. The market was so hot that Chinese developers were taking on massive borrowings to build apartments ahead of demand. In fact, property developers built so many apartments that one-fifth of the homes in China were empty, Insider's Lina Batarags reported in October 2021.
Lardy told CNN there will be a long period of adjustment when the market absorbs the excess supply and as developers resolve issues with the unfinished projects that people have bought in advance.
Property investment in China fell nearly 18% in July from a year ago — marking its 17th straight month of decline, according to Reuters calculations based on official data released on August 15.
Lardy did not immediately respond to a request for comment from Insider sent outside regular business hours.
