In order to prevent the continued decline of the bleak real estate market, the Chinese authorities recently announced three so-called “big moves”, including the introduction of a 300 billion yuan (approximately 415 billion USD) fund to purchase existing housing inventory. The Chinese media has praised these actions as “epic” policy measures. However, market analysts believe that acquiring housing inventory would require at least 5 trillion yuan (approximately 691 billion USD), casting doubt on the current financial capacity of the authorities. Moreover, behind these policies lies the grim reality of overall economic indicators in China facing a comprehensive decline.
On May 17th, during a video conference on real estate work held by the Chinese State Council, the People’s Bank of China and financial regulatory authorities successively introduced the “three big moves” to coincide with Vice Premier He Lifeng’s call for a “decisive battle” on addressing the risks of unfinished commercial housing projects.
The first move involves lowering the down payment ratio for home purchases. The down payment ratio for first-time home buyers has been adjusted to no less than 15%, while the minimum down payment ratio for second homes has been adjusted to no less than 25%. This marks the first time in China’s over 40-year history of commercial housing that even during the two major stimulus efforts in 2008 and 2016, the down payment ratio for first homes remained at 20%.
Regarding the reduction of the down payment ratio to 15%, market feedback suggests that this policy simply makes it easier for buyers to “get on board”, but it indirectly increases buyers’ monthly payments and total mortgage amounts, posing a “trap” that needs to be considered in conjunction with mortgage rates.
The second move involves lowering mortgage rates. This includes lowering the interest rates on provident fund loans for home purchases and removing the lower limit on commercial mortgage rates.
The People’s Bank of China issued a notice stating that as of May 18, 2024, the interest rates for individual housing provident fund loans have been reduced by 0.25 percentage points, with rates adjusted to 2.35% for loans with a term of less than or equal to 5 years and 2.85% for loans with a term of over 5 years. Meanwhile, the interest rates for second homes under the provident fund scheme have been adjusted to no less than 2.775% and 3.325% respectively.
Regarding the lower limit on commercial mortgage rates, the Chinese government typically sets a market benchmark rate (LPR) for mortgages and allows for slight fluctuations based on market competition. Now, this benchmark rate has been removed, allowing banks to freely determine mortgage rates based on market conditions.
Official Chinese media claims that following the implementation of these policies, mortgage rates in most cities may decrease by 0.3 to 0.4 percentage points. Based on a loan amount of 1 million yuan, a term of 30 years, and equal principal and interest repayment, total interest expenses could be reduced by over 70,000 yuan.
However, it’s worth noting that prior to the implementation of these policies by the Chinese government, many cities facing immense pressure from housing inventory had already lifted the lower limits on mortgage rates. This recent announcement serves more as a formalization of existing practices. Data shows that as of the end of March, out of 343 cities in China (prefecture-level and above), 75 cities had lowered the lower limits on first-home mortgage rates, with 64 cities abolishing them altogether. With the exception of a few first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen, most cities have reduced mortgage rate lower limits to a unified national level.
Market experts believe that the formal announcement by the authorities to remove the lower limits on home purchase loan rates, following previous adjustments made by cities, leaves limited room for further significant decreases. As for strong real estate markets in first-tier cities that hadn’t made adjustments before, the extent to which they will follow suit remains to be seen.
The third move involves the Chinese authorities signaling their intention to directly acquire housing inventory. He Lifeng stated that in cities with excessive commercial housing inventory, the government can purchase a portion of these properties at a reasonable price for use in affordable housing projects. Subsequently, the central bank announced plans to establish a re-lending program for affordable housing, with a scale of 300 billion yuan, an interest rate of 1.75%, a term of 1 year, extendable 4 times.
Deputy Governor of the People’s Bank of China, Tao Ling, mentioned that the central bank will provide re-lending amounting to 60% of the loan principal, which is expected to drive bank loans totaling 500 billion yuan (approximately 691 billion USD).
With the Chinese real estate market experiencing over two years of turmoil, various policies introduced by the authorities have all proven unsuccessful. He Lifeng’s proposition that the government can purchase some commercial housing for use in affordable housing projects has become the focal point of this latest round of efforts to stabilize the market.
However, the actual data of the real estate market and analysis by experts reveal that while the authorities aim to rescue the real estate market, they face a severe shortage of necessary funds. The so-called “epic” policy measures lauded by the media may turn out to be all thunder and no rain.
According to data from E-House China R&D Institute, as of March 2024, the inventory of new commercial residential properties in 100 major Chinese cities totaled approximately 49.916 million square meters, categorized by first-tier, second-tier, and third-fourth-tier cities as 35.86 million square meters, 24.163 million square meters, and 22.167 million square meters, respectively.
Typically, there is a certain period from the completion of a commercial property to its sale, known as the “inventory turnover period,” which varies depending on economic conditions and the status of cities such as first and second-tier cities. In March, the inventory turnover periods for new commercial residential properties in 100 cities were as follows: 19.2 months for first-tier cities, 21.6 months for second-tier cities, and 33.1 months for third-fourth-tier cities. By comparison, the inventory turnover periods in December 2019 before the pandemic were 12.2 months, 8.9 months, and 10.2 months, respectively.
Analyst Song Xuetao from Tianfeng Securities believes that the authorities’ aim in directly acquiring housing inventory is to boost and stabilize the current real estate market and reduce the inventory turnover period to less than 18 months. Based on Tianfeng Securities’ calculations, achieving this goal would require around 7 trillion yuan (approximately 9.675 billion USD).
Moreover, Nomura Securities estimates that there are up to 20 to 30 million unfinished housing units in China, with the government needing to spend at least 440 billion USD to complete them. Barlays Bank estimates that the scale of housing inventory in China amounts to 28 trillion yuan (approximately 3.9 trillion USD). Meanwhile, Arthur Budaghyan, Chief Emerging Markets Strategist at BCA Research in Canada, suggests that at least 5 trillion yuan (approximately 6.91 billion USD) needs to be injected into the struggling Chinese real estate market to have a meaningful impact on the economy.
Currently, the 3 trillion yuan re-lending program announced by the People’s Bank of China is deemed to be just a drop in the bucket. Mike Sun, a North American investment advisor, told Dajiyuan that Beijing’s touted three strongest measures in history have limited effects on revitalizing the real estate market. With government debt burdens and a lack of available funds, the efforts to reduce inventory seem more flashy than substantive. Additionally, the key issue lies in the widespread lack of confidence among ordinary people, who are major players in housing demand, leading to a significant decline in purchasing enthusiasm.
It is noteworthy that the backdrop for the recent policy measures by the Chinese authorities to rescue the real estate market is the comprehensive decline in major economic data in April, continuing the severe situation of “declining volume and price” in the real estate market.
Official data shows that in April, China’s social financing scale decreased by nearly 200 billion yuan (27.7 billion USD), marking the first decrease in over two decades. This reduction indicates a decline in the need for funds such as loans among enterprises, suggesting that the economy may be entering a contraction phase. Social financing refers to the total amount of funds obtained by the real economy from the financial system within a certain period, serving as a key indicator directly reflecting the economic situation.
In addition, narrow money in circulation reflecting economic activities, such as cash and demand deposits of enterprises (M1), saw a 1.4% year-on-year decrease in April, signaling subdued commercial activities.
Data released by the National Bureau of Statistics of China on May 17th indicates that from January to April, real estate development investment in China totaled approximately 3.1 trillion yuan (around 4.286 billion USD), a year-on-year decline of 9.8%. Construction area for real estate was 687.544 million square meters, down by 10.8% year-on-year. The sales area of new commercial residential buildings reached 292.52 million square meters, down by 20.2% year-on-year, with the sales area of residential buildings dropping by 23.8%. The sales value of new commercial residential buildings was 2.8067 trillion yuan (approximately 3.871 billion USD), a decrease of 28.3%, and residential sales value declined by 31.1%.
In April, among 70 major cities, only 6 cities saw an increase in the selling prices of new commercial residential properties compared to the previous month, a decrease of 5 cities from the prior month. The remaining 64 cities experienced a month-on-month decline, accounting for approximately 91% of the reporting cities.
Analyst Guan Rongxue from Zhuge Research Center stated that the downward pressure on new housing prices in April further intensified, with an overall expanding month-on-month decline in prices across 70 cities, a significant decrease in the number of cities seeing price increases, reaching a historical low. Overall, the market prices continue to languish, seemingly without a bottoming out in sight.