China’s recent property measures, introduced on 17 May, represent a significant policy pivot aimed at fixing the serious challenges in its real estate sector. The measures come on the heels of the recent Central Committee of the Communist Party of China (CCP) Politburo meeting in April, which shows that the Government is finally recognising that stabilising the property market should be a top priority.
The People’s Bank of China announced that the minimum down payment for first-time homebuyers will be reduced from 20% to 15%. It also scrapped the floor on mortgage rates. The central bank said it would provide $41.5 billion in cheap loans to help state-owned enterprises buy housing built but not sold.
Source: MacroVisor
A lack of consumer confidence and withholding spending continues to be a major issue for the property market. For years, the Chinese government discouraged property speculation, emphasizing that “homes are for living.”
The government’s official data shows that Beijing has a long way to go to increase confidence in the real estate market. The amount of unsold homes is at a record high, and property prices are declining at a record pace.
The inventory of unsold homes was equivalent to 748 million square meters, or more than eight billion square feet, according to China’s National Bureau of Statistics. In April, new home prices in 70 cities fell 3.5% from a year earlier, while prices for existing homes fell 6.8%, both record-breaking declines.
Those trends have continued and people are worried about sinking their money into property where the handover of property under construction has been unpredictable, often resulting in building construction companies going bankrupt and failing to complete. Home prices have been falling since 2019.
The pandemic certainly made things a lot worse. And now, the situation is such that property developers are stuck and claiming bankruptcy. People are stuck because they have money locked in these unfinished properties.
And then there is the issue of local government debt. The Local Government Funding Vehicles (LGFV) continue to see their debt burden increase with interest payments. Unfortunately, it’s getting to a level where servicing this interest or refinancing this debt is a challenge. Local governments traditionally generate cash flows by selling land to property developers (who have now stopped buying).
All this amounts to a vicious cycle. Therefore, while the measures formulated last week were a good step in the right direction, they may not be quite enough to reverse the trend.
China’s leaders have set a goal of 5% economic growth this year, a plan that many economists believe is ambitious and will require aggressive government spending.
China’s property crisis has been fueled by years of heavy borrowing by property developers and overbuilding that underpinned much of the country’s decades-long run of rapid economic growth. But when the government finally intervened in 2020 to put an end to risky practices by developers, many companies were already on the precipice of collapse. One of its biggest property developers, China Evergrande, defaulted in late 2021 under huge piles of debt. It left behind hundreds of thousands of unfinished apartments and unpaid bills worth hundreds of billions of dollars.
The property market in China is of major importance to Australian bulk commodity exporters. Our largest export product, iron ore going to China, is used in steelmaking. About a third of Chinese steel is consumed in their domestic property market – so the health of that sector is critical for some of our largest companies like BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) and Fortescue Ltd (ASX: FMG), not to mention our national accounts.
