How the Chinese state aims to calm the property market

Three decades ago much of the housing in China’s cities belonged to state-owned enterprises, which provided homes to workers at low rents. A lot has changed since then. China is now blessed, if that is the right word, with a sprawling commercial property market, which has produced vast numbers of flats and equal amounts of drama. Since the height of the last boom in 2020, sales have dropped by more than half. To try to put a floor under the market, China’s government has turned to a new, old solution. It wants state-owned enterprises to step in to buy unsold property and turn it into affordable housing.

The policy was announced on May 17th after an unusual video conference by He Lifeng, China’s economic tsar. The country’s central bank will offer cheap loans worth up to 300bn yuan ($42bn) to 21 banks, which will in turn lend to eligible enterprises owned by city governments. These firms will use the money to buy finished but unsold flats from property developers, including private-sector ones. The flats can then be either sold or rented at below-market rates to low-income buyers.

Excitement followed the announcement. Some observers took it as a sign that ministers have overcome their reluctance to bail out irresponsible developers. They hope the state will function as a buyer of last resort to stabilise the property market, even if that entails public money flowing to private capitalists.

Moreover, the policy was only one jab in a “combination punch”, as Eva Yi of Huatai Securities, a brokerage, has put it. The other wallops include measures to stimulate private demand, such as permitting lower mortgage interest rates and downpayments. There was a new push for local governments to buy back idle land from developers, with the proceeds of special bonds that were previously reserved for other purposes. Officials also exhorted banks to hasten lending to a “whitelist” of viable but unfinished real-estate projects. China must “fight the tough battle” to deal with unfinished housing projects and “promote key tasks, such as...digesting the existing commercial housing,” said Mr He, in a combination punch of metaphors.

This flurry of announcements suggests that China’s central government is at least tackling the property crisis with greater urgency and a wider range of tools. But the central-bank facility itself will make only a modest contribution to solving China’s property crisis. For one thing, it is too small. Flats available for sale at the end of April were worth about 3.9trn yuan, according to Huatai. Such properties are, in any case, a smaller problem than the stock of unfinished, pre-sold properties or the overhang of finished, sold but unoccupied flats that already exist on the market. Robert Ciemniak of Real Estate Foresight, a research firm, estimates that in recent months, sales of existing homes in the secondary market have exceeded sales of new homes for the first time, at least in the nine cities for which reliable data exist.

The policy also has many moving parts. Before the state can start buying properties, city governments must buy in to the central bank’s scheme. In theory, the facility allows them to prop up local developers and expand affordable housing in one fell swoop. But in beleaguered cities where unsold inventories are high, the demand for affordable housing will probably be weak. Other central-bank schemes, including a similar tool for the purchase of rental housing, have attracted little interest.

A struggling property market ought to expand the supply of affordable housing automatically, through the magic of lower prices. In China, however, developers in most of the country are not allowed to reduce prices too sharply. Local governments worry about the prospect of protests from existing homeowners, who paid much more for the same flats. With luck, the central bank’s scheme will succeed in segmenting the market, allowing property developers to offer realistically low prices to designated state-owned enterprises, without causing too much uproar. Prices may be truly flexible only when the state is paying them. Three decades into the commercialisation of real estate, Chinese property still defies market forces. ■