(Bloomberg) — China’s latest housing plan targets vacant homes, a major pain point in a crisis that has dragged on for almost three years. But analysts say the package of measures remains too small to end the rout.
Most Read Articles on Bloomberg
The decline in new home sales in China has accelerated in recent months, with households increasingly preferring to buy on the secondary market. That has pushed the stock of unsold homes and vacant land to the highest levels in years, stifling new construction and threatening to lead to more defaults by developers, including big state-run companies.
The aid package announced on Friday includes 300 billion yuan ($42 billion) from the People’s Bank of China to fund bank loans to state-owned enterprises accused of buying up completed but unsold housing inventory. The frame is included. Economists expressed concerns both about the limited scale of the measure relative to the stock of unsold homes and the risk that it would not be fully implemented.
Officials said the People’s Bank of China’s program could facilitate bank loans worth 500 billion yuan. That would only address a fraction of the value of China’s vacant apartments, which economists estimate at trillions of yuan.
The economists, led by Goldman Sachs Group’s Wang Lisheng, cited previous research on securing unpaid housing inventory, saying, “Innovative housing relief measures (including housing inventory reduction measures) have “Significantly more funding than is available will likely be required,” he wrote in the memo. Returning to 2018 levels would require 7.7 trillion yuan.
Bloomberg’s index of Chinese developer stocks rose last Monday morning to the highest since late 2022, as investors booked profits and concerns emerged over whether the measures will be enough to contain the real estate crisis. It fell as much as 3.2% on Monday morning, after hitting a record high for the week.
Bloomberg Economics speaks…
“Assuming purchases were made at a 30% discount to market prices, the government would be able to purchase nearly 2% of new homes for sale or under construction. Although not on a large scale, it could help boost confidence and stabilize markets…implementation will not be easy, with limited financial resources and misaligned goals between central and local governments. can also be a hindrance.”
— Economists, Chang Shu, David Qu, Eric Zhu
Read the full report here.
This was in contrast to positive coverage in Chinese state media on Monday. The Securities Times reported that Chinese developers’ sales centers in more than 10 cities, including Beijing and Shanghai, saw a surge in homebuyer visits over the weekend.
President Xi Jinping’s economic czar is backing a high-profile program that would give local governments the responsibility of turning unsold apartments into affordable housing. The real estate sector has been the biggest drag on the world’s second-largest economy, weighing heavily on sentiment and consumer spending.
Questions remain as to whether banks will make the most of the new facilities. Rory Green, chief China economist at TS Lombard, said the involvement of commercial lenders would “limit the speed and effectiveness of capital deployment.”
The People’s Bank of China’s previous commercial bank lending program for rental housing projects had low take-up rates, with only 2% of the funds utilized. The new inventory-reduction initiative has already been tested in eight cities and has been most effective in in-migration areas, which not all large cities meet.
Programs that encourage local governments to buy unused land from developers are also facing challenges. Many regions are under financial stress, and in Friday’s briefing, officials warned that these efforts should not increase municipal debt risk.
Local governments will be allowed to use a portion of their 3.9 trillion yuan annual bond borrowing facility for new initiatives, much of which is already earmarked for infrastructure projects.
Adam Wolf, emerging market economist at Absolute Strategy Research, said it’s unclear whether local governments will be willing to pay “anything close to what developers paid” for land. He added: “If developers have to recognize land bank losses, they may have to recognize not only cash flow issues but also solvency issues.”
To increase bank lending to developers to ensure existing projects are completed, authorities are ramping up so-called “whitelisting” efforts to identify developments worthy of support. The plan, introduced in January, has approved more than 900 billion yuan in loans, officials said.
However, according to the country’s statistics office, the funds do not appear to have reached real estate companies. Real estate companies raised less than 600 billion yuan in loans for construction projects in the first four months of this year. This is a 9% decrease compared to the same period last year.
Whitelisting programs are limited by incentives from commercial banks, which are concerned that developer defaults will affect their profits. The same issue applies to new measures that allow banks to lower mortgage rates and down payment requirements.
Lenders have already cut mortgage rates to historic lows and may be reluctant to lower them further. Chinese banks on Monday kept their benchmark lending rates unchanged, following the People’s Bank of China’s decision last week to keep the key interest rate unchanged on loans offered to lenders.
“The impact of this policy will be limited by the narrowing of banks’ interest margins,” said Serena Chou, senior China economist at Mizuho Securities Asia.
Households may also take advantage of lower rates to buy existing properties rather than new construction, as prices will fall further and delivery will not be a concern. Existing home sales in China exceeded new home sales by region for the first time on record last year, highlighting a fundamental shift in buying habits and meaning less cash for developers.
Howes Song, an economist at the Paulson Institute, a U.S. think-thanks organization, said lowering mortgage rates may be effective in large cities with high demand for housing, but in smaller cities where interest rates have already been significantly lowered. He said it was ineffective.
“The new policy could encourage property sales for several months,” he added. “But I don’t think it will be enough to reverse the trend.”
–With assistance from Fran Wang and Jing Jin.
(Updated report on repeat customers, market reaction, economist views, and banks’ LPR decisions.)
Most Read Articles on Bloomberg Businessweek
©2024 Bloomberg LP