Troubled market: Residential buildings under construction in Hangzhou, China. The country is reported to have 382 million sq m of excess housing inventory. — AFP
Beijing: In May, China’s central government urged more than 200 cities to buy unsold homes to ease oversupply.
More than three months later, only 29 have heeded the call.
The glacial pace of implementation – driven in large part by the unattractive economics of the plan for local governments – underscores the challenge President Xi Jinping faces as he tries to arrest a record property slump that’s threatening to undermine the country’s growth targets.
The plan has been a key part of the government’s attempt to shore up the real estate sector, while achieving Xi’s goal of creating more affordable housing.
The disappointing progress raises the pressure for more forceful measures as China tries to deal with 382 million sq m of excess inventory, equivalent to the size of Detroit.
“Local governments have made slow headway,” Ding Zu Yu, chairman of Shanghai CRIC Info Tech Co, wrote in a late August report.
Purchases stood at only 1.9% of unsold apartments nationwide as of July, Ding estimates.
Local bureaucrats are reconciling the demands from Beijing while trying to be prudent about costs.
Buying apartments at this point makes little financial sense for those officials, as apartment prices are expected to drop at least another 30% in major cities before stabilising, according to Jefferies Financial Group Inc.
Estimated returns from turning inventory into affordable housing are also below the cost of funding.
Rental yields in China’s tier-one cities averaged just 1.4% in 2023, compared with the central bank’s funding rate of 1.75%, according to Macquarie Group Ltd.
A few cities have proposed heavy bargaining to minimise their risks, raising doubts on whether distressed developers would be willing to sell their inventory.
In southern Guangdong, Foshan city proposed to buy at no more than 50% of prices of similar projects nearby.
Within the same province, Dongguan city plans to price for-sale affordable housing at around 50% of new-home values in a survey, meaning buying costs would be even lower than that.
The potential for improved returns exists only if unsold homes were bought at a significant discount, said Tyran Kam, senior director on Asia-Pacific Corporate Ratings at Fitch.
But local governments might also be wary of doing this because of the “socio-political repercussions for local homeowners”, he said.
The move risks further stressing local finances that are already on shaky ground.
Regional governments’ ability to spur growth has been undermined by a record drop of income from land sales, with their budget spending shrinking in the first seven months.
Among all 31 provinces and municipalities, only Shanghai recorded a fiscal surplus in the first half.
“We do not expect a wide rollout of the purchase programme due to the lack of funding and the fact that banks and state-owned firms need to bear the full credit and investment risks,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC.
After the People’s Bank of China (PBoC) unveiled the initiative in May, the central bank called on more than 200 cities to advance the plan, according to a state media report.
The next month, the Housing Ministry pushed the programme to be widened to counties, meaning 387 lower prefectures were also encouraged to join.
Authorities in at least 60 cities have voiced support for the initiative, according to China Index Holdings. But not many have announced detailed rules to pave the way for implementation, said its research director Chen Wenjing.
While state buying of housing inventory is widely seen as a key step toward easing the glut, uptake of the central bank’s funding support has also been low. — Bloomberg
