China is fixing housing market with a long gaze

No quick fix. China’s plan to resolve its property mess is off to a slow start. Only 4% of a 300 billion yuan ($42 billion) relending scheme to help mop up residential inventory has been drawn by local governments and state firms, central bank data shows. Meanwhile policymakers last week recommitted to drastic reforms which could exacerbate the industry's slump. Beijing is determined to remodel the sector, even if it requires more time and pain.

Hopes were high when China announced “historic” steps in May to tackle its housing crisis. Local governments were encouraged to buy unsold residences from developers and turn those into public housing. According to state media more than 80 cities have announced plans aimed at destocking supply. The problem is only a handful of cities, such as Chongqing and Fuzhou, have actually made purchases, with fewer than 10,000 apartments in total.

On first glance, this is too little and too slow. The People’s Republic has to pour in about 2 trillion yuan to mop up 10% of the supply glut nationwide if it is to put a floor under slumping prices, Goldman Sachs analysts estimated in a June report based on housing data in 80 cities. In a recent note, UBS analysts lowered their 2024 GDP growth forecast to 4.6% from 4.9%, citing a property downturn that's yet to bottom, among other factors. One issue is that officials are grappling with profound market changes and need time to assess their impact.

Local governments, for example, now have more power to set their own housing market rules, such as removing price caps on new projects. There may also be more policy support coming. Beijing is planning to allow local governments to fund their home purchases by issuing more special bonds, Bloomberg reported this month, citing unnamed sources.

Yet China is also using the crisis to roll out changes that ought to make the property sector a more stable feature of the $17 trillion economy. In a press conference last week, the housing ministry reiterated it will accelerate a transition away from the current presale system, where developers sell uncompleted housing projects to homebuyers, and towards a "sales upon completion" approach.

It will slow the recovery for distressed developers including China Evergrande and Country Garden, and the overhaul could weigh on household sentiment as the industry settles into a new normal. Either way, a quick boom after the bust seems unlikely.