China Reveals Major Moves to Stabilize Property Crisis – Reuters

China announced “historic” measures to stabilize the crisis-hit property sector. These include local governments buying “some” apartments, relaxing mortgage rules, and pledging to deliver unfinished homes.

Investors anticipate these steps as the start of more decisive government intervention to offset declining demand, slow falling prices, and reduce the growing stock of unsold homes.

Analysts urge government action to support a sector that once made up a fifth of GDP but now burdens the world’s second-biggest economy. The property market’s sharp decline since 2021 has led to developer defaults, leaving many construction sites abandoned and undermining confidence in China’s longstanding savings choice.

China Real Estate Newspaper, a publication managed by the housing ministry, said the “heavyweight policies” marked “a significant historic moment” for the property sector.

“It’s a positive and encouraging direction, that the governments are stepping in to buy housing inventory,” said Larry Hu, chief China economist at Macquarie.

“But in order to evaluate how powerful the impact will be, the key questions are: who will be funding the purchase and how much they’ll fund in the end.”

China’s housing ministry announced that local governments can direct state-owned firms to purchase “some” homes at “reasonable” prices to bolster the property sector.

Vice Premier He Lifeng mentioned this plan to provide affordable housing without specifying a timeline or target for the purchases. Additionally, he noted that local governments, already burdened with $9 trillion in debt, can repurchase land sold to developers. He also pledged that authorities would “fight hard” to finish stalled projects.

Large Inventory

The central bank announced a 300 billion yuan ($41.53 billion) relending facility for affordable housing and plans to reduce mortgage rates and downpayment requirements. This led to a nearly 9% increase in China’s CSI 300 Real Estate index.

Raymond Yeung, ANZ’s chief Greater China economist, noted that Friday’s policies reflect authorities’ recognition of the urgent need to address the property market downturn.

“It’s a bold step,” he added. “But how all the local governments will have the financial capability to fulfil the central mandate is an open question.”

Goldman Sachs estimates saleable housing inventory at 13.5 trillion yuan ($1.87 trillion) at the end of 2023 and because some of their construction had not been finished, it would require 5 trillion yuan of capital investment to complete them.

In January-March, new housing for sale totaled 395 million square meters (4.25 billion square feet), marking a 24% year-on-year increase. Tianfeng Securities analysts estimate the total cost to purchase this stock will be around $1 trillion. A senior executive from a Shanghai-based developer, speaking anonymously, noted that current inventory-clearing policies are notably robust compared to past ones.

The government appears to ‘pay the bill’ psychologically, shifting risks from property to banks and local governments since the property market soured in 2021. China has responded by lowering interest rates and down payments, while many cities have relaxed or eliminated previous purchase restrictions.

A campaign promoted by Chinese authorities at a recent political meeting urges people to exchange old apartments for new ones but faces limited interest in buying second-hand homes. Concerns persist about housing demand in a country with a significant demographic decline, particularly since 96% of households already own at least one home.

Poor Data

The stock market’s upbeat mood clashed with grim realities on the ground. Poor housing data emerged on Friday, alongside a Hong Kong court hearing involving Country Garden (2007.HK), whose liquidation was sought. The hearing was adjourned until June 11. Another major developer, China Evergrande Group (3333.HK), faced liquidation in January. New home prices fell for the tenth consecutive month by 0.6% month-on-month in April, marking the sharpest decline since November 2014. Additionally, property investment in the first four months of 2024 dropped by 9.8% compared to the previous year.

Property sales by floor area in January-April logged a 20.2% slide year-on-year, while new construction starts fell 24.6%. Funds raised by developers were also down 24.9% year-on-year.

“Record high housing inventory and liquidity pressure on developers threaten financial stability … and the still frail economic recovery,” said Rocky Fan, economist at Guolian Securities.

The policies aim to curb the property crisis fallout, but reversing the downward trend will require time.

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