China’s property bust won’t be fixed without the intervention of the state – East Asia Forum

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As the Third Plenum looms next month, the country’s troubled real estate sector won’t be far from top Chinese policymakers’ minds.

China’s real estate industry is grappling with huge challenges. In the first quarter of 2024, all the signs for nationwide real estate development were headed south. Real estate investment was 2.2 trillion RMB (US$303.5 billion), a year-on-year decrease of 9.5 per cent. New home sales were 226.7 million square metres, down 19.4 per cent year-on-year, with new construction starts, by floor area, falling by 23.4 per cent. New home sales were to 2.1 trillion RMB (US$290 billion), down by 27.6 per cent, with residential sales dropping by 30.7 per cent. At the end of March 2024, the area of unsold residential housing grew by 23.9 per cent.

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With big political, economic and social stakes involved, the national government unveiled a big package of measures in mid-May 2024 to prop up the real estate industry and avert systemic damage to the economy. These include asking local governments to buy up inventories and easing residential purchase rules through the People’s Bank of China, such as cutting down-payments and mortgage rates.

These policy measures were seen as unprecedented, and they are expected to have some positive effects on the country’s real estate industry.

For homebuyers in large cities, the reduction in down-payments and home lending rates may alleviate financial burdens a little. In Beijing, the down payment for an ordinary residential apartment might be reduced by hundreds of thousands of renminbi. On a 1 million RMB (US$138,000), 30-year first-time home loan from the housing provident fund total interest costs will fall by 48,500 RMB (US$6692). According to monitoring by the China Index Academy, the first weekend after the new policy was introduced there was a measurable lift in visits to real estate offices, with new home sales in 30 key cities increasing by 8.5 per cent week-on-week.

Better managing idle land will also help cities with high commercial housing inventories. The government can purchase commercial housing and repurpose it as affordable housing at reasonable cost. This may help financially troubled real estate companies. Increasing the supply of affordable housing could improve livelihoods and promote local economic development, as China’s latest round of affordable housing construction targets families with low incomes, technicians, teachers and medical professionals.

Yet these measures will hardly resolve the Chinese real estate sector’s fundamental problems.

On the supply side, estimates suggest that reducing the de-stocking cycle by half would require several trillion RMB. Even 300 billion RMB (US$41.4 billion) in repurchase funds and PBoC’s issuance of re-lending at 60 per cent of the loan principal would only cover bank loans up to 500 billion RMB (US$69.0 billion). Local governments, the hardest hit in this real estate downturn, are already financially stretched. Even if interest rates fall as low as 1.75 per cent, low rates of return on affordable housing make it difficult to support larger-scale financing.

On the demand side, the overall economic environment, the high household debt ratio and households’ propensity to save for education and medical expenses continue to constrain purchasing power. Despite generally falling housing prices, many apartments in first- and second-tier cities still cost millions of RMB, with a stubbornly high housing price-to-income ratio.

Addressing the real estate sector’s oversupply problem, some suggest, requires market correction with minimal government intervention. This approach may enhance market efficiency and achieve true price discovery. But it poses significant risks, including heightened market volatility and potential largescale social unrest.

In the short term, China’s central government will have to intervene more to support the real estate market and stabilise house prices, to ensure against economic systemic risks.

This means a bigger call on central government coffers, such as through issuing additional trillions of RMB in special bonds to purchase existing housing. The numbers show that the bid multiple for the 24 Special Treasury Bond 01 on 17 May 2024 was 3.9 with a marginal multiple as high as 382.6. This reflects strong investor demand and indicates that there is still substantial room for bond issues. The central government can seize the opportunity to build affordable housing in a deflationary environment with low interest rates. But bond issuance, generally speaking, will be premised on continued moderate economic growth.

But deeper and faster state intervention via institutional reforms is needed. Central and local governments have to sort out their responsibilities and expenditure roles in this.

Local governments will have to adapt to local conditions, accelerating the development of particular industries and innovation based on local resource endowments and market demand. Introducing and expanding local taxes — such as a high-end property tax, resource tax and carbon tax — can provide stable revenue sources and reduce reliance on land transfer income. Not only will these tax measures increase local fiscal revenue, but they will also guide local economies towards technological innovation and low-carbon development.

China must also accelerate reform of its social security and income distribution, helping to support a lift to household consumption. This will require coordination between the central and local governments and active participation by the whole of society, particularly business owners and the wealthy.

In addition, household registration system reforms are necessary to eliminate socioeconomic constraints on migrant workers. This might help increase household consumption and residential occupancy in currently empty housing blocks in the medium and long term, but will also lead to some short-term economic pain.

China’s real estate industry faces a bumpy road ahead. Only bold and well-coordinated actions will allow it to navigate the current turbulence. The key lies not just in immediate relief but in accelerated institutional reform that will ensure stability and sustainable growth.

Yuhan Zhang is a Political Economist based at UC Berkeley. He also runs the China’s Economy and the World blog.

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