China’s housing rescue is too small to end ongoing crisis, say analysts

By Tom Hancock

 

China’s latest housing initiative is aimed at vacant properties, a major pain point in a crisis that’s dragged on for almost three years. But analysts say the package of measures is still too small to end the rout.

 

The decline in China’s sales of new homes accelerated in recent months, with households increasingly preferring to buy in the secondary market. That’s pushed up the stock of unsold homes and empty land to the highest level in years, discouraging new construction and threatening more defaults by developers — including large state-owned firms.

The support package announced Friday features a 300 billion yuan ($42 billion) facility from the People’s Bank of China that will fund bank loans for the state companies charged with buying up completed-but-unsold housing stock. Economists expressed concern both about the limited size of the measure relative to the stock of unsold housing, and the risk it won’t be fully implemented.

Officials said the central bank programmeme can incentivise bank loans worth 500 billion yuan. That would only address a fraction of the value of vacant apartments in China, which economists estimate at multiple trillions of yuan.

The facility is “well short” of what’s necessary to ease financial strains among developers, said Rory Green, chief China economist at TS Lombard.

The programme, which gives local governments the responsibility to turn the apartments into affordable housing, received high-profile backing from President Xi Jinping’s economy czar on Friday. Still, doubts remains as to whether banks will make full use of the facility. Commercial lenders’ involvement will “limit the speed and efficacy of fund deployment,” Green said. 

A previous PBOC lending programme for commercial banks aimed at rental housing projects saw a low level of take-up, with just 2 per cent of the funds having been utilised. The new destocking initiative has already been trialled in eight cities, and worked best in areas with population inflows — a condition not met by all metropolises.

“Any game-changing housing easing measures (including those for housing destocking) would likely require significantly more funding than available thus far,” Goldman Sachs Group Inc. economists led by Lisheng Wang wrote in a note, citing earlier research that getting outstanding housing inventory back to 2018 levels would require 7.7 trillion yuan.

A programme encouraging local governments to buy unused land from developers also faces challenges. Many regions are fiscally strained, and officials at a briefing on Friday warned that such efforts shouldn’t increase local government debt risks.

Regional authorities will be allowed to use some of their annual 3.9 trillion yuan bond borrowing quota for the new initiative — but much of that has already been earmarked for infrastructure projects.

It’s unclear if local governments will be willing to pay “anything close to what the developer paid,” for land, said Adam Wolfe, emerging markets economist at Absolute Strategy Research. “If developers have to recognise a loss on their land banks, then they might have to recognise some solvency problems, not just cash flow issues.”

To boost bank lending to developers to ensure they finish existing projects, officials are doubling down on a so-called “white list” effort that identifies developments meriting support. That plan, introduced in January, has seen approved lending reach more than 900 billion yuan, according to officials.

But the funds don’t seem to be reaching property companies, which raised less than 600 billion yuan in loans for construction projects in the first four months of the year, according to the country’s statistics bureau. That’s down 9 per cent on a year earlier.

The white-list programme is limited by the incentives of commercial banks, which worry about developer defaults impacting their bottom line. The same issue applies to new measures that allow banks to lower mortgage rates and down-payment requirements.

Lenders have already lowered mortgage rates to historic lows, and could be reluctant to make further cuts.

“The impact of this policy will be bounded by banks’ squeezed interest rate margins,” said Serena Zhou, senior China economist at Mizuho Securities Asia Ltd.

Households might also use lower rates to buy existing properties rather than newly built ones, as those prices have fallen further and delivery isn’t a concern. China’s existing-home sales overtook new homes by area for the first time on record last year, underscoring a fundamental shift in buying habits that means less cash for developers.

Cutting mortgage rates to stimulate sales may work in larger cities with more housing demand, but not in smaller ones where rates have already been cut to the bone, said Houze Song, an economist at the Paulson Institute, a US think thank.

“The new policies may stimulate property sale for a couple of months,” he added. “But I doubt it is sufficient to reverse the tide.”

First Published: May 20 2024 | 8:24 AM IST