China property: Beijing’s stimulus plan needs more time, money and policy support to resolve long-standing housing crisis

China has US$3.9 trillion worth of unsold properties, which makes Beijing’s funding plan account for less than 2 per cent of that excess inventory
There is also a big question mark on how local governments, saddled with US$5.7 trillion in debt, would be able to absorb the unsold properties

China property

Aileen ChuangandDaniel Renin Shanghai

Published: 6:31pm, 18 May 2024

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After Beijing introduced its most ambitious effort to date to revive the property sector and bolster the country’s economic recovery, analysts and economists find the plan’s scale too small and remain uncertain about its effectiveness.

Market experts suggested that initiatives to solve the long-standing property crisis will need more meat on the bone, as policymakers approach this issue with a heightened sense of urgency.

Still, Chinese property stocks received a boost from some positive sentiment after Beijing announced a slew of policy measures, including easing mortgage rules and encouraging local governments and state-owned enterprises (SOEs) to buy unsold housing inventory.

On Friday, Longfor Group Holdings surged 11 per cent to HK$15.30 and China Overseas Land and Investment jumped 4.4 per cent to HK$16.52. China’s CSI 300 Real Estate index of shares jumped 9.1 per cent, while the Hang Seng Mainland Properties Index, a gauge tracking 10 home builders listed in Hong Kong, advanced 5.3 per cent.

Chinese Vice-Premier He Lifeng speaks at the opening of the China International Import Expo in Shanghai on November 5, 2023. He on Friday called on local governments to buy back idle residential land and unsold homes to aid distressed developers. Photo: Kyodo

“We view the scrapping of the mortgage rate floor and eased mortgage rates for housing provident fund loans as positive for lifting buyers’ sentiment,” Morningstar equity analyst Jeff Zhang said. “We think it may take a longer cycle for the policy tailwind to translate to home-purchasing activities, with the effects remaining to be verified.”

China is unlikely to see a rebound of new home sales and property investment immediately, according to an HSBC research report on Friday. “What’s held back potential homebuyers might be the lack of assurance of home deliveries,” HSBC economists Jing Liu and Taylor Wang wrote.

The Ministry of Housing and Urban-Rural Development vowed to ensure property projects are delivered on time and will pursue judicial proceedings to protect the legitimate rights and interests of homebuyers.

“The data releases for April indicate that the caution entrenched over the past several years will take some time to recover,” said Lynn Song, chief economist for Greater China at ING. “Fortunately, the policy roll-out has begun, and the impact of supportive policies should gradually begin to trickle through the economy in the months ahead.”

The cautious view of industry watchers reflects how the deterioration of China’s housing market, which has dragged the mainland’s economic recovery efforts, remains daunting and would need more time, money and policy support than what Beijing has so far introduced.

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Both the economists from HSBC and ING Bank described the latest stimulus measures as “just the beginning”, especially after the April activity data showed that property-related indicators remained weak.

Beijing on Friday said it will set aside 300 billion yuan (US$41.5 billion) in “relending” funds for SOEs to purchase unsold homes and for local governments to convert these excess inventory into affordable housing.

While those funds should help expedite housing inventory absorption, “execution risk looms as the actual timing and scope of funding remain uncertain”, Morningstar’s Zhang said.

The People’s Bank of China, the country’s central bank, said the 300-billion-yuan in financing would translate into an estimated 500 billion yuan of credit for housing purchases. Such scale is “too small compared with the current decades-high housing inventory to sales ratio of 33 months”, according to a Barclays research report on Friday.

The UK investment bank estimated that China has 28 trillion yuan worth of unsold properties, which makes the latest funding plan account for less than 2 per cent of unsold inventory.

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There is still a big question mark on how local governments, saddled with hefty debts, would be able to absorb the unsold housing inventory. According to an estimate by Daiwa Capital Markets Hong Kong, local governments in China had 41 trillion yuan of debt and 60 trillion yuan worth of “augmented debt” or local government financing vehicles as of 2023.

Daiwa analysts Patrick Pan and Yue Tan said in a research note on Friday that local governments’ home purchase plans are likely to cost 5.5 trillion yuan. “Before the central government releases a detailed action plan or offers more financing support, we stay conservative on the fiscal feasibility and final impact of the campaign,” they wrote.

Most experts say the property sector will remain a drag on China’s economy this year. The government has aimed for a 5 per cent gross domestic product growth this year.

“While it is arguably one of the most important signs of a stabilisation in China, it is worth noting that a potential bottoming out of housing prices would only be the first step,” ING’s Song said.

Residential buildings under construction in Jinan, capital of eastern Shandong province, on May 9, 2024. Photo: Bloomberg

Homebuyers in Shanghai, meanwhile, were not enthused by the stimulus measures announced on Friday, as they bet on a further price drop owing to a bearish economic outlook.

“The government’s incentives are the result of a crisis of confidence because consumers are wary of buying property amid worries about job and income,” said Kiki Qian, a 40-year-old Shanghai resident who anticipates another 10 per cent plunge in housing prices. “Would-be buyers like me will not sign any purchase contract unless homeowners agree to further slash prices.”

Property brokers in the city described local residents’ reaction to the new policies as lukewarm.

“Few people came to us to show their home-buying interest today,” said Yan Zhancai, a consultant at an outlet of Lianjia, mainland China’s largest real estate brokerage, on Nanquan Road in Shanghai. “It looks as if lower mortgage rates are not enough to inspire them to make purchase decisions.”

Unlike other cities like Hangzhou, capital of eastern Zhejiang province, that removed all home-buying restrictions to encourage home ownership, Shanghai has yet to scrap the austerity measures, which bars households from owning a third flat, that was introduced in 2011 to rein in the city’s then-red-hot property market.

“Even if a home-buying spree takes place on the back of the eased home-purchase restrictions, it will turn out to be short-lived because most homebuyers remain cautious and expect a downward spiral to continue,” said You Liangzhou, owner of property agency Baonuo in Shanghai.