CHINESE policymakers have identified reducing a glut of housing inventory as the key to ending the nation’s unprecedented property slump. It’s easy to see why.
The country has the equivalent of 60 million unsold apartments, which will take more than four years to sell without government aid, according to Bloomberg Economics. The oversupply is dragging down prices at the fastest rate in a decade, giving people less reason to buy a home. The situation is worst in the capital city.
To break this vicious cycle, the central bank recently announced a 300 billion yuan (S$57 billion) initiative for local governments to purchase unsold homes. On the demand side, it urged cities to reduce minimum down payments and mortgage rates to entice buyers. But it remains to be seen whether the steps will succeed in shrinking supply and ending the crisis.
“Housing inventory is at its highest in China’s history,” said Jay Lau, a property analyst at S&P Global Ratings. “The latest property policies could be a temporary confidence booster.”
Top cities
Even in China’s four tier-1 cities, where the market is relatively resilient, it will take an estimated 27 months to sell the supply of new homes as at April, according to China Real Estate Information Corporation (CRIC). That is the longest in at least seven years. By comparison, the US has about nine months’ supply of new homes, according to the US housing department.
Three of China’s biggest cities – Shanghai, Shenzhen and Guangzhou – have rolled out major easing for homebuyers, slashing downpayment requirements and allowing room for cheaper home loans. Analysts expect Beijing, the other tier-1 city, to do the same. China’s capital has the longest monthly overhang in unsold homes, according to CRIC.
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There’s no guarantee that the loosening will revive home sales immediately. Homeowners even in big metropolitan areas are losing conviction in their decades-long belief that property is a reliable store of wealth, according to Yan Yuejin, director of E-house China Research & Development Institute.
“There is a fundamental change in homebuyers’ confidence over the biggest cities in the long term,” Yan said. “While low-tier cities have higher outstanding housing stock, the major inventory issue lies in bigger ones.”
As at April, about 80 per cent of China’s cities had an inventory absorption pace that was worse than a “warning line” of 18 months, according to CRIC. That’s even after developers refrained from offering new projects amid lacklustre sales, leading new supply to shrink 20 per cent from March.
Floor space
The challenge looks just as daunting when measured by floor space. Residences completed by developers but unsold expanded to 391 million square metres nationwide as at April, the highest since 2017, official data show. Including properties that are almost finished and approved for presale, the stock is much larger at about 1.8 billion square metres, JPMorgan Chase estimates. Most of the excess sits in lower-tier cities, according to S&P.
China’s support package announced on May 17 is estimated to translate into 500 billion yuan of credit to help government-backed firms buy housing stock from developers. Yet that is unlikely to make a big enough dent in the supply, according to economists.
Reducing the inventory to a more optimal level through government-backed acquisitions would require five trillion yuan, according to JPMorgan analyst Karl Chan. CGS International Securities HK’s Raymond Cheng estimates one trillion yuan to two trillion yuan of funding is needed.
There are also questions over the programme’s implementation as smaller trials earlier have struggled to get traction amid questions over the incentives for local governments, developers and banks.
Developer relief
Not all of China’s developers will be able to tap the property-purchase plan to swap inventory for much-needed cash. Many have pledged a large part of their real estate held for sale to secure loans, making it tough for them to divest the assets, said Bloomberg Intelligence (BI) analyst Kristy Hung. KWG Group Holdings, for example, pledged 92 per cent of its properties held for sale as at the end of last year, according to BI.
The rescue fund might have more meaningful impact in injecting liquidity for China Vanke and Longfor Group Holdings, whose unpledged properties held for sale exceeded their short-term debt as at last year, BI estimates. They now have the option to offload slow-selling inventory to local government-backed firms at a discount to beef up cash. BLOOMBERG
