"Developers took 100% of the sale price for a new home before it was built, but spent that money on things other than building said home, relying on debt and new sales to keep construction going on previously sold homes."
They likely spent at least some of the money from new buyers building units for earlier buyers. This works pretty well as long as the number of new buyers keeps increasing.
It is what is commonly referred to as a "Ponzi scheme" (and technically it is not a Ponzi scheme but a related type of fraud known as a pyramid scheme): use new investors to pay off old investors.
The scheme works beautiful so long as there are enough new investors to keep everyone happy.
In China's case, the wheels came off the moment Xi imposed his "three red lines", forcing developers to deleverage. Without access to new debt issuance the money flow which kept everyone happy dried up, and the entire scheme began to collapse.
Interestingly enough, this is a similar dynamic to the collapse of the CDO markets following the subprime mortgage crisis of 2006-2007, culminating in the Great Financial Crisis of 2008. Ben Bernanke, once he took over as Fed Chair from Alan Greenspan, hiked interest rates specifically to cool off the subprime mortgage market, which he felt was "overheated" (in his defense, it was). What Bernanke failed to appreciate was the extent to which the subprime mortgage industry was driven by ARMs and refinancing activity. The entire industry functioned on the presumption that people would always be able to refinance before the balloon payments hit.
When Bernanke raised rates precipitously, mortgage rates followed suit and in short order many if not most subprime mortgages could no longer qualify for refinancing--and the mortgage holders could not afford (or were unwilling to make) the balloon payments when they hit. (the payments themselves grew larger than previously anticipated on the basis of the rate hikes, further exacerbating the situation).
Thus began the death spiral of mortgage defaults, which turned more and more CDOs toxic, triggering one investment banking crisis after another, leading to the bank bailouts through TARP.
China appears to be experiencing a similar paroxysm of credit collapse, and it has having similar contagion effects.
Much like the subprime mortgage crisis, and much like the related sovereign debt crisis of 2010-2011, the crux of the matter was always that the money from the property had been spent, there was no getting it back, and no good way to sustain the active debts currently in play.
"Developers took 100% of the sale price for a new home before it was built, but spent that money on things other than building said home, relying on debt and new sales to keep construction going on previously sold homes."
They likely spent at least some of the money from new buyers building units for earlier buyers. This works pretty well as long as the number of new buyers keeps increasing.
It is what is commonly referred to as a "Ponzi scheme" (and technically it is not a Ponzi scheme but a related type of fraud known as a pyramid scheme): use new investors to pay off old investors.
The scheme works beautiful so long as there are enough new investors to keep everyone happy.
In China's case, the wheels came off the moment Xi imposed his "three red lines", forcing developers to deleverage. Without access to new debt issuance the money flow which kept everyone happy dried up, and the entire scheme began to collapse.
Interestingly enough, this is a similar dynamic to the collapse of the CDO markets following the subprime mortgage crisis of 2006-2007, culminating in the Great Financial Crisis of 2008. Ben Bernanke, once he took over as Fed Chair from Alan Greenspan, hiked interest rates specifically to cool off the subprime mortgage market, which he felt was "overheated" (in his defense, it was). What Bernanke failed to appreciate was the extent to which the subprime mortgage industry was driven by ARMs and refinancing activity. The entire industry functioned on the presumption that people would always be able to refinance before the balloon payments hit.
When Bernanke raised rates precipitously, mortgage rates followed suit and in short order many if not most subprime mortgages could no longer qualify for refinancing--and the mortgage holders could not afford (or were unwilling to make) the balloon payments when they hit. (the payments themselves grew larger than previously anticipated on the basis of the rate hikes, further exacerbating the situation).
Thus began the death spiral of mortgage defaults, which turned more and more CDOs toxic, triggering one investment banking crisis after another, leading to the bank bailouts through TARP.
China appears to be experiencing a similar paroxysm of credit collapse, and it has having similar contagion effects.
Much like the subprime mortgage crisis, and much like the related sovereign debt crisis of 2010-2011, the crux of the matter was always that the money from the property had been spent, there was no getting it back, and no good way to sustain the active debts currently in play.