Analysts Wary of China’s New Property Stabilization Measures

Residental buildings in Huaian, in China's eastern Jiangsu Province, on Nov. 16, 2022. STR/AFP via Getty Images

News Analysis

Underscoring the crisis that has plagued China’s property markets over the past several years, authorities unveiled a series of new measures on May 17 to revitalize the crisis-ridden sector after the latest data showed housing sales have slumped by over 30 percent since the beginning of the year.

Yet, while investors hope that the new measures might improve market sentiment, stabilize declining prices, and reduce the surplus of unsold homes in the short term, some analysts caution that they may not be sufficient to prevent further contraction in the coming years.

“Government purchases of unsold housing may help to stabilize China’s property sector in the near term, alleviating a key economic headwind. But they won’t prevent the sector from shrinking considerably further by the end of this decade,” wrote Julian Evans-Pritchard, head of China Economics at Capital Economics, in a note.

Despite several rounds of support measures implemented over the past two years that have failed to revive the sector, Vice Premier He Lifeng reportedly disclosed at a video conference on May 17 that local governments will be allowed to buy “some” apartments.

The aim, according to the vice premier, is to address waning demand for new and old apartments and reduce the growing stock of unsold homes.

He added that these homes would be allocated to provide affordable housing, while local governments could also repurchase land from developers. However, no specific timeline or funding details were provided.

Easy Finance

In a separate development on May 17, the People’s Bank of China decided to effectively eliminate the nationwide minimum mortgage interest rate.

The central bank reduced the minimum down payment requirement for first-time homebuyers to 15 percent and for second homes to 25 percent. Previously, these ratios were set at 20 percent and 30 percent, respectively.

At the State Council press conference the same afternoon, the central bank also revealed its plan to introduce a 300 billion yuan (about $42.25 billion) relending facility aimed at backing the government-subsidized housing initiative.

The central bank said that local state-owned enterprises will be incentivized to use the funds to acquire constructed homes. These will subsequently be allocated to provide affordable housing.

China’s market has been experiencing a multi-year slump since 2021, when authorities cracked down on excessive borrowing by property developers. The downturn affects a wide range of consumer products, including home furnishings and appliances, and industries such as construction. It has contributed to the slowest growth in decades in the world’s second-largest economy.

Numerous builders responsible for the high-rise apartments that have transformed China’s urban landscapes have defaulted on their debts. Consequently, hundreds of projects have stalled and remain unfinished.

Expensive Price Tag

Still, while the recent policies signal the authorities’ recognition of the urgent need to address the property market downturn, analysts question whether local governments have the financial capacity to implement the central mandate effectively.

“At first glance, this appears expensive,” said the multinational bank HSBC in a note. “The amount of unsold private housing space is rising, while all major real estate metrics point to further deterioration. There is a wide range of estimates of how much is needed to acquire excess supply from the market but all in the range of trillions of yuan.”

Estimates vary widely, but analysts reckon that there are tens of millions of unfinished and unsold apartments across China following the collapse of the building boom.

“It is difficult to estimate the size of new housing inventory [but] China’s ’real' housing inventory peaked at 2.84 billion square meters in 2021, before easing slightly to 2.66 billion in 2023. However, from the gap between cumulative new home starts and new home sales, 2.07 billion square meters of new homes remained unsold by 2023,” said analysts at Daiwa Capital Market in a May 17 note.

Assuming policymakers aim to reduce the nationwide destocking cycle to 20 months and that local governments acquire unsold homes at a 30-percent discount to the average nationwide property price of 10,000 yuan (about $1,382) per square meter, the destocking campaign could cost between 3.4 trillion yuan (about $470 billion) and 7.6 trillion yuan (about $1 trillion), according to Daiwa.

“We think the seemingly small scale of government-led housing inventory destocking reflects the difficulties arising from three areas,” added Barclays FICC Research in a May 17 note.

These include the massive funding required for local governments to achieve more balanced supply-demand dynamics, the potential moral hazard in selecting which developers to purchase properties from, and setting acquisition prices that would incentivize developers to participate in government purchase schemes, according to the British multinational bank.

Learning From the Past

“It’s important to keep in mind the initial acquisition cost isn’t the same as the final ‘bailout’ cost,” says HSBC, citing China’s 2006 banking reform to clean up non-performing loans and infuse public capital.

According to HSBC, while the total cost of the cleansing efforts was estimated to be 9 percent of GDP then, the four state-owned Chinese banks eventually had to dole out 2.66 times the bailout costs by the time it was implemented.

“The final cost depends on when (and whether) there will be a turnaround,” it added.

Fundamental Challenges Persist

Nonetheless, even though a sizable local government home acquisition could catalyze a turning point in the sector, Mr. Evans-Pritchard said it still falls short of addressing more fundamental challenges.

According to him, while the government buy-back will alleviate financial strains by transferring the liabilities of unsold homes from stressed builders to local governments, it will do little to improve the depressed sentiments within the property sector.

China’s average daily home sales during the public holiday plummeted 47 percent compared to the previous year’s May Day holiday, data from private research firm China Index Academy (CIA) revealed earlier this month.

In addition, they were roughly 30 percent lower than the bustling pre-pandemic levels seen over the same holiday period in 2019. Home sales were down in 19 of 22 surveyed cities during the five-day May Day compared to the same period of 2023, and more than 60 percent in megacities such as Guangzhou and Shanghai.

Given that the nation’s investment in property development fell 9.8 percent year-on-year, while investments in residential property were down by 10.5 percent from January to April 2024, according to official data, “this will still necessitate major structural changes in property sector activity,” said Mr. Evans-Pritchard.

“The necessary pullback in construction activity is still in its early stages and will become a more significant economic headwind during the second half of this decade,” he added.

However, investors in China’s property sector brooded as Beijing’s fresh measures fell short of expectations.

“Though it’s crucial to prevent significant risk spillovers from the property sector to the banking sector and the real economy, policymakers appear to have no intention to turn the sector from a growth drag to a driver, given the shift in their policy focus towards high-quality growth,” wrote analysts at Goldman Sachs in a note on May 18.

After steadily gaining in May, following the Politburo’s April 30 announcement about its intentions to clear housing inventory, Hong Kong’s Hang Seng Mainland Properties Index closed 0.7 percent lower on May 20. The index dropped 2 percent during the day.