(Bloomberg) — 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 people responded to the call.
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The glacial pace of implementation – largely driven by the plan’s unattractive economics for local governments – underlines the challenge President Xi Jinping faces as he tries to stem a record real estate sector decline that threatens to undermine the country’s growth goals.
The plan has been a key part of the government’s effort to support the real estate sector while achieving Xi’s goal of creating more affordable housing. The disappointing progress increases pressure for stronger action as China tries to deal with its 382 million square meters of excess inventory, equivalent to the size of Detroit.
“Local governments have made slow progress,” Ding Zu Yu, chairman of real estate information platform Shanghai CRIC Info Tech Co., wrote in a report in late August. Purchases amounted to just 1.9% of unsold apartments nationwide in July, Ding estimates.
Local bureaucrats are appeasing Beijing’s demands while trying to be cautious about costs. Buying apartments makes little financial sense for these officials right now, as apartment prices in major cities are expected to fall by at least 30% more before stabilizing, according to Jefferies Financial Group Inc.
The estimated returns from converting inventory into affordable housing are also below financing costs. According to Macquarie Group Ltd, rental yields in China’s top cities averaged just 1.4% in 2023, compared with the central bank’s funding rate of 1.75%.
A few cities have proposed resorting to tough negotiations to minimize their risks, raising questions about whether distressed developers would be willing to sell their inventory. In southern Guangdong, the city of Foshan proposed purchasing at no more than 50% of the price of similar projects nearby. Within the same province, the city of Dongguan plans to price affordable housing for sale at about 50% of the value of new housing, meaning the purchase cost would be even lower.
The potential for better returns only exists if unsold homes are bought at a significant discount, says Tyran Kam, senior director of Asia-Pacific Corporate Ratings at Fitch. But local governments may also be wary of this because of the “sociopolitical implications for local homeowners,” he said.
This move threatens to put further pressure on local finances, which are already on shaky ground. Regional governments’ ability to stimulate growth is being undermined by a record decline in land sales revenues, with their budget spending shrinking in the first seven months. Of all 31 provinces and municipalities, only Shanghai recorded a budget surplus in the first half.
“We do not expect a broad rollout of the purchase program due to the lack of financing and the fact that banks and state-owned enterprises must bear the full credit and investment risks,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC. .
A Bloomberg index of major Chinese developers fell as much as 1% on Wednesday to the lowest level since late April. That followed a heavy drop the day before after some builders were removed from a program linking the Shanghai and Shenzhen stock exchanges with the Hong Kong stock exchange.
Central Bank Program
After the People’s Bank of China unveiled the initiative in May, the central bank called on more than 200 cities to promote the plan, according to a state media report. The following month, the Housing Ministry pushed to expand the program to provinces, meaning 387 lower prefectures were also encouraged to join.
Authorities in at least 60 cities have expressed support for the initiative, according to China Index Holdings. But not many have announced detailed rules to pave the way for implementation, said research director Chen Wenjing.
While government purchases of housing stock are widely seen as an important step toward easing surpluses, central bank financing support has also been low.
Public data showed that only 12.1 billion yuan ($1.7 billion), or 4% of the PBOC’s 300 billion yuan lending program, had been utilized by the end of June.
The limited use of existing financing programs indicates that returns and cash flow from public housing are “insufficient” to service associated debt, Fitch Ratings analysts wrote in an Aug. 29 note.
Analysts are also skeptical about whether central bank financing is enough, as it is only a fraction of the 1 trillion to 5 trillion yuan needed to solve the supply-demand mismatch.
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To address financing problems, China is considering letting local governments use special loans to buy up surplus housing, which would give them access to as much as 1.6 trillion yuan in financing, Bloomberg reported last month. That would be more than enough to finance the home-buying program, which is expected to reach no more than 1 trillion yuan in the 2024-2025 period, according to Bloomberg Intelligence.
Relaxing rules
Strict purchasing requirements have also increased the challenges. In May, a suburban district in Hangzhou determined that potential targets would include an en-bloc asset with ample parking space. Chongqing requires that the selection of buildings within one kilometer have a subway station, a school and a hospital.
Yet other cities with similar requests are lowering the bar. In August, Shenzhen’s southern technology center stopped requiring the target assets to be fully built. The city of Zhaoqing in southern Guangdong province no longer limits purchases to en-bloc buildings. The city of Shangqiu in central Henan province has dropped its location standards.
“More cities are likely to relax their rules to expand the pool of potential targets,” Ding wrote.
But for now, China may struggle to sell its housing market rescue plan to local governments, says Bloomberg Intelligence analyst Kristy Hung. “The meager rental income hardly justifies the risk.”
(Updates with stock response in tenth paragraph.)
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