China has a housing problem. A huge one. It has nearly four million apartments that no one wants to buy, a total unwanted living space nearly the size of Philadelphia.
Xi Jinping, the country’s leader, and his deputies have called on the government to buy them.
The plan, announced last week, is Beijing’s boldest move yet to stem the housing crisis threatening one of the world’s largest economies. It’s also not nearly enough.
China has a bigger problem behind those empty apartments: there are even many houses that developers have sold but haven’t finished building. According to a conservative estimate, that number is about 10 million apartments.
The scale of China’s real estate boom is breathtaking. Its relentless bankruptcy, which began nearly four years ago, remaining vast and unclear.
China’s leaders faced a slowdown after three decades of double-digit growth before the housing crisis created a recession that spiraled out of their control. Few experts believe Beijing can shift to more sustainable growth without having to deal with empty apartments and the overworked developers who build them. Collectively, trillions of dollars are in the hands of builders, painters, real estate agents, small companies and banks across the country.
After decades of fueling the biggest real estate boom the world has ever seen and allowing it to account for nearly a third of China’s economic growth, Beijing suddenly stepped in in 2020 to cut off the money. easily spurred expansion, causing a financial crisis. chain of bankruptcies that shocked a nation of homebuyers.
This is the first test of Beijing’s determination to wean the Chinese economy from its decades-long dependence on construction to sustain the economy.
Now the government is facing another test of its resolve. To prevent past excesses, over the past few years it has signaled that no real estate company is too big to fail. But when dozens of major developers went bankrupt, they wiped out any remaining confidence in the housing market. Since then, officials have tried everything to restore buyer optimism. Nothing has worked.
With few buyers, the developers still standing are also on the brink of default. And they are intricately connected to the local banks and financial systems that underpin the government in every village, town and city. A recent estimate by research firm Rhodium Group puts the real estate sector’s entire domestic borrowing, including loans and bonds, at more than $10 trillion, of which only a fraction very small was noted.
“Not being able to sell your home may seem like a risk right now, but it’s not. More and more developers are going bankrupt, said Dan Wang, chief economist at Hang Seng Bank. The first major developers to default, like China Evergrande, all had problems hiding in plain sight.
by Evergrande initial default in December 2021 has raised concerns about China’s own “Lehman moment,” a reference to the collapse of Lehman Brothers in 2008, which triggered a global financial crisis. However, the fallout was carefully and quietly managed through policy support that helped Evergrande complete the construction of many apartments. At the time the judge ordered the company to liquidation Five months ago, Evergrande was no longer a viable business.
But China has tens of thousands of smaller developers across the country. The only way for officials to stop the market’s free fall is to rescue some midsize developers in cities where the crisis is more severe, Ms. Wang said.
Instead, China’s top leaders are refocusing their lens on the millions of apartments no one wants to buy. commit to turn them into social housing with lower rents. It has committed $41.5 billion to support loans to state-owned companies that have begun buying unwanted assets – a total of 8 billion square feet, of which more than 4 billion square feet are apartments. The household has not been sold yet. according to to the National Statistics Office.
When Beijing’s response was announced last week, shares of the original developers rose. However, some critics say the initiative has come too late. And most speculate that it will cost more. Estimates range from $280 billion to $560 billion.
Officials in Beijing began to soften last year. They directed banks to provide loans and other financing to dozens of real estate companies they deemed good enough to be on the government’s “white list.”
The support is not enough to prevent housing prices from plunging.
Policymakers have pulled other levers. They made the biggest mortgage rate cut ever. They have tested pilot programs to encourage people to exchange old apartments and buy new ones. They even offered cheap loans to some cities to test the idea of buying unsold apartments.
In total, local authorities have tried more than 300 measures to increase sales and strengthen real estate companies, according to Caixin, a Chinese economic news agency.
However, the number of unsold homes continues to reach new levels. New home prices continue to decline. So in late April, Mr. Xi and 23 of his top policymakers began discussing the idea of removing some unwanted apartments from the market in what was not unlike a program. Asset relief program in difficultywas established by the United States government following the collapse of the American housing market.
Last week, China’s highest-ranking official in charge of the economy, Vice Premier He Lifeng, convened an online meeting of officials across the country and made an announcement: It’s time to start buying apartment. Not long after, the central bank relaxed mortgage regulations and the central bank promised to provide billions of dollars to help state-owned companies buy apartments.
The move underlines how worried the government is about dysfunctions in the housing market.
However, almost immediately after state media reported that Mr. He called on local authorities to buy unsold apartments, economists began to ask questions.
Should local authorities buy all unsold apartments? What if they can’t find a buyer? And there is a price to pay: Economists calculate that such a program would be worth hundreds of billions of dollars, not tens of billions.
More worryingly, for some, the central bank has quietly begun an apartment buyback program for eight hard-hit cities, pledging $14 billion in cheap loans, of which only 280 million USD spent. Those governments don’t seem interested in using loans for the same reason that consumers don’t want to buy homes in smaller cities.
A big difference now is political will, said John Lam, head of China real estate research at UBS, the Swiss bank. The country’s most powerful leaders said they support the buyback plan. That will put political pressure on officials to act.
Mr. Lam said: “Local authorities may lose money when buying back apartments.
However, in places where populations are shrinking, i.e. some of the cities and towns where developers are expanding most aggressively, there will be little demand for social housing projects.
The optimistic view is that Beijing has more planned.
“Beijing is on track to end its epic housing crisis,” Ting Lu, chief China economist at Japan’s Nomura bank, wrote in an email to clients.
The task is a difficult one that requires “more patience in waiting for more draconian measures,” he added.
