A man looks at an unfinished residential building where he bought a flat at the Gaotie Wellness City complex in Tongchuan, Shaanxi province, on September 12, 2023. Recent statements by the central government about its willingness to ‘study policies to digest the housing stockpile’ have raised hopes that the glut of unfinished but pre-sold homes will be addressed. Photo: Reuters
Opinion
The View
by Nicholas Spiro
The View
by Nicholas Spiro
China property: how much of the housing stockpile can the government digest?
The crisis in China’s property market is severe enough for the government to show willingness to tackle the backlog of uncompleted pre-sold projects
While this is cheering news for many, uncertainty over the timing, scale and source of the funding remains
For a good gauge of market perceptions of the credibility of Beijing’s response to the crisis in the housing market, look no further than the research reports of Nomura, one of the most bearish voices on China whose analysis of the country’s property sector is as incisive as it is gloom-ridden.
Since the end of last year, Lu Ting, Nomura’s chief China economist, has been calling on the government to “reach into its own pockets, even with printed money” from the People’s Bank of China “to support the completion of new homes that were pre-sold by developers”.
While many other global investment banks have become more optimistic – or at least less pessimistic – about China this year, Nomura has remained resolutely downbeat. It said as recently as February 18 that Beijing had not yet “determined what measures [were] most effective in halting the downward spiral in the property sector”.
However, last week Lu was surprisingly upbeat, at least by his own bearish standards. In a report on April 30, he said Beijing “had taken a significant step towards cleaning up the big mess” in the housing market. When even Nomura strikes an optimistic tone on China, it suggests a significant policy shift in the property sector has occurred.
Shortly before Nomura published its note, Beijing announced it would explore new measures to tackle the housing crisis. The statement that caught the attention of analysts was the government’s willingness to “study policies to digest the housing stockpile”.
The stronger emphasis placed on securing the delivery of pre-sold homes comes amid speculation the government is mulling setting up a national platform to acquire pre-sold but unfinished housing projects, a move JPMorgan says would likely be viewed by markets as a “bazooka” measure.
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What is clear is that the severity of the downturn in the property market has forced Beijing’s hand. The fundamentals of the sector continue to deteriorate. Real estate investment shrank 9.5 per cent in the first quarter of this year, and new home sales from the 100 biggest developers last month fell 45 per cent on an annualised basis.
S&P Global Ratings notes that while sales in the secondary market rose 30 per cent last year, transactions in the primary market kept falling because of persistent concerns among buyers that developers did not have the funds to complete pre-sold homes.
While Beijing is coordinating efforts to identify developers and projects eligible for fast-track funding, more forceful measures to secure home completions could help restore confidence and put a floor under prices. “It’s an important signal that could reduce downside risk in the sector,” said Michelle Lam, Greater China economist at Societe Generale.
The challenge facing policymakers is huge. Goldman Sachs estimates there were 3.5 billion square metres (37.7 billion square feet) of pre-sold but uncompleted homes at the end of last year, 40 per cent of which were attributable to private developers facing liquidity pressures. The funding gap for all private developers to secure the delivery of pre-sold homes stood at a staggering 4 trillion yuan (US$556 billion).
A view of an unfinished residential compound developed by China Evergrande Group in the outskirts of Shijiazhuang, Hebei province, on February 1. Photo: Reuters
Nomura believes that one way or another the central government will have to get involved in ensuring the delivery of pre-sold homes, possibly by setting up a special agency charged with absorbing unfinished private housing units. Those could then be sold or rented out as part of the government’s efforts to build more affordable homes.
This would kill three birds with one stone. First, it would increase demand for construction workers and raw materials, boosting growth. Second, it would improve confidence in the housing market, especially the discredited presales model. Third, it would help underpin financial stability as rising construction activity would help ease the liquidity strains in the real estate sector.
However, while the stronger emphasis on housing destocking marks an inflection point in the policy response, it raises more questions than it answers. The biggest uncertainty is over the timing, scale and source of the funding to ensure the delivery of stalled housing projects. As is invariably the case with Chinese policymaking, details are scarce, priorities conflict with each other and market expectations are too high.
It is not surprising Nomura expects the central government to take a direct role in securing home completions given the reluctance of banks to increase their exposure to property development. S&P Global Ratings notes that property development lending grew 1.5 per cent last year compared with total loan growth of 11 per cent. Local governments, meanwhile, are heavily indebted and must balance the need to stabilise the property market with the risk of fuelling speculation.
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This leaves the central government in a bind. Beijing needs to revive the housing sector without transferring too much risk from developers to the state and state-backed entities. Just as importantly, it needs to restore confidence among homebuyers and arrest the decline in prices without compromising its main objective of downsizing the real estate industry to help new growth drivers take hold.
If there is a “bazooka” that is needed in China, it is a credible and effective enough one to thread the needle. Investors banking on a recovery in the housing market should temper their expectations. “The best one can hope for is a stabilisation of the market,” Lam said.
Still, it appears the collapse of the property sector is now severe enough for the government to tackle the vast backlog of uncompleted pre-sold projects, one of the key factors holding back demand. While this is not the main reason for the recent improvement in investor sentiment towards China, it helps brighten the mood.
