Chinese government’s attempt to buy homes from distressed developers may help the property sector
Over the past few years, the Chinese government has been ramping up its efforts to stabilise the troubled property sector. Mortgage rates and down payment ratios have been reduced, home purchase restrictions have been abolished in more than 20 cities, and incentives such as subsidies and tax rebates have been granted to homebuyers. Some cities even offer to make it easier for homeowners to sell their properties to buy newly built ones.
Nonetheless, these direct efforts to boost demand have not been very successful so far, as the primary cause for fragile home demand seems to be public concern about developers’ ability to complete housing construction. This is especially the case when most of the new houses in the Chinese market are pre-sold, meaning that they are bought before they are completed, as developers rely on the cash flow from buyers’ payments to finish their projects.
In April, for an illustration, newly built home prices in China slumped by 3.1% year-on-year, marking the 10th straight month of decline and the fastest pace since July 2015 (Chart 1). The plunge came despite the measures to mitigate the blow from a prolonged property downturn.
Moreover, data compiled by Wind and Capital Economics suggest that while sales of completed properties are recovering after the introduction of the “Three Red Lines” — regulatory guidelines for developers related to ratios of debt to cash, equity and assets — sales of uncompleted properties remain on the decline. With consumer confidence at the heart of the problem, the recent indi - rect attempt by the government to buy millions of unsold homes from distressed developers is likely to have greater success.
In other words, if the scale of the scheme is large enough, not only will developers have funds to finish pre-sold homes, but homebuyers, seeing that new houses are being delivered, will also be more confident about buying new houses. This should help create a positive cycle in the property sector.
In the best-case scenario where confidence is restored, this policy could help boost home sales by 33%, according to Capital Economics. On the other hand, if the support is unable to help increase confidence among homebuyers, any benefit that developers gain could be short-lived.
The effect on house prices, however, should not be huge. One of the reasons for this is that the local Chinese authorities usually are the ones who determine the final listing prices. Also, most developers still have large inventories of unsold houses. Thus, there is unlikely to be a supply shortage that causes house prices to shoot up.
In sum, China’s property sector has long been plagued by weak demand, primarily due to low consumer confidence. Therefore, measures that restore confidence among homebuyers, like the policy to buy unsold homes from troubled developers, are ones that are likely to succeed in increasing home sales.
Nonetheless, even if attempts to boost sales accomplish their goals, the impact on property prices should be low as there are still numerous inventories of unsold, unfinished houses. Also, local authorities have the final say in deciding market prices for housing.
Sources:
https://www.reuters.com/markets/rates-bonds/china-cut-mortgage-interest-rates-home-downpayment-ratio-boost-demand-2024-05-17/
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https://www.voanews.com/a/chinese-cities-liftcurbs-on-buying-homes-as-property-crisisbites-/7604187.html
https://www.reuters.com/markets/asia/china-property-shares-hk-jump-report-government-plansbuy-unsold-homes-2024-05-16/