Beijing’s repositioning of the real estate market is a risky endeavour

The real estate sector, once a crucial engine for China’s rapid growth, now holds a significantly lower position in the economy and faces mounting challenges.

Since 2022, the government has progressively eased its market tightening regulations and recently formulated new policies to address key challenges, particularly the serious oversupply in the housing market. The question remains whether these measures can help steer the sector through rough waters onto a healthier and sustainable path for long-term development.

The current phase of sluggishness in China’s real estate sector began in 2021, shortly after Beijing reaffirmed its commitment to reposition this sector and imposed stringent tightening regulations.

In fact, this round of policy initiatives followed earlier efforts to curb the sector’s rapid expansion and soaring housing prices, which had persisted since housing reforms emerged in the 1990s. These measures included capping housing prices, restricting sales and purchases and controlling home mortgages. However, it was not until the late 2010s that the property market stabilised.  

In 2020, the government added new rules to further strengthen market regulations. Two significant measures, “three red lines” and “two red lines”, largely constrained real estate developers’ financing capacities and set banks’ lending limits.

The resulting tighter financing constraints for the developers led to several problems in the real estate sector, including delayed delivery of housing projects and serious financing difficulties for both upstream and downstream firms. Moreover, during the pandemic, stringent Covid-19 policies, such as various mobility restrictions across the country, led to a significant contraction in economic activities and transactions in the property market.

A serious and persistent weakening of the property market may result in serious risks in the finance sector and disturbances to social stability, especially if not well managed.

Throughout 2022, the government rectified some excessive stringent measures to avert potential crises. It gradually relaxed certain market regulations, such as setting qualification requirements for home buyers and sellers, as well as guiding prices. Although the property market briefly rebounded in the first half of 2023, this sector then plunged into a downturn again. That round of policy easing was unable to stabilise the sector as hoped. 

Particularly since the pandemic, the government has articulated new policies aimed at restructuring housing supply to maintain market stability and avert potential risks. Central to these policies are measures to guarantee housing delivery, enhance public housing provision and de-stock the property market.

Ensuring housing delivery has always been a top priority in China’s policy considerations. After the government imposed strict regulations in 2020, such as the three red lines, some real estate developers faced financial challenges and subsequently stalled construction of their ongoing housing projects. In the summer of 2022, widespread mortgage boycotts took place across China, pressing the government to address these problems. 

The government responded quickly by setting up guaranteed delivery systems in affected cities. The central bank allocated 200 billion RMB for suspended projects to resume construction in late 2022. It also channelled another 200 billion RMB to encourage six banks to support these systems.

In early 2024, the government launched a new scheme involving both local housing and financial authorities to jointly identify a whitelist of suspended housing projects. They later recommended financial institutions to provide loans and closely monitor their use. 

Moreover, the government has put new efforts into enhancing public housing and destocking housing inventory. The first is the “Three Major Projects” announced in mid-2023, which proposed to build affordable public housing, redevelop shantytowns and provide dual-use facilities.

The government decided to consider “increasing public housing” the first priority in this initiative and planned to accelerate the supply of public housing in the market. In addition, increasing public housing supply is also incorporated in the second initiative, destocking housing inventory. 

The issue of destocking was first raised during the Chinese Communist Party Politburo’s meeting in April 2024. Shortly after, local state-owned enterprises (SOEs) were prompted to buy unsold homes with relatively low prices to reduce housing inventory. They were also required to convert part of these newly acquired homes into public housing.

In May 2024, the central bank unveiled a relending programme with 300 billion RMB to support such purchases by SOEs. A few local branches of 21 state banks are also involved in this programme to finance SOEs’ purchases. More recently, the Ministry of Housing and Urban-Rural Development specifically urged county-level and above governments to implement the destocking measures and support public housing.

While new destocking measures will take time to yield substantial results, they have been instrumental in helping restore consumer confidence and have led to a modest price rebound in the resale market in first-tier cities, such as Shanghai and Shenzhen.

However, in most Chinese cities, housing markets remain gloomy. Prices of both new and resale houses continued to decline in May 2024, likely due to the vast amount of home inventory in the market and increasingly cautious buyers. 

It is important to note that the current round of policy measures is not designated to bail out or revive the stagnant property sector, but to stabilise it.

First, as the Chinese leadership reiterated, the top priority of housing policies is to reduce financial risks and prevent social crises. Given the substantial number of unsold homes in the market, which totalled over seven trillion square metres as of May 2024, the re-lending programme falls significantly short of addressing the oversupply issue in China’s property market.

Second, it is evident that the government aims to steer the real estate sector towards a healthier development path, by emphasising public housing and promoting the growth of other sectors.

Both the Three Major Projects and the destocking initiative focused on restructuring housing supply to include more public units. This approach will ultimately reduce the dominance of commercial housing and contribute to more stable housing prices in the marketplace.  

Furthermore, the economy’s reliance on the real estate sector will decrease. Although the real estate sector will remain an important component in the economy, it will not necessarily be a primary engine for growth. Instead, the government aims to devote more energy to develop prioritised industries, such as new energy and artificial intelligence. Consequently, the real estate sector will not see its prosperity of the past. 

Demographic shifts towards smaller and older populations will also reshape people’s perceptions of property needs. As housing prices stabilise or potentially decline in the future, homes may no longer serve as investment vehicles for the general public to park their wealth. 

To sum up, the problems in China’s real estate sector are deep-rooted, longstanding, and extensive. The government’s policy goal to reposition the sector’s role in the economy is both desirable and logical. However, effective implementation requires thorough policy deliberation and careful design, especially when the economy is facing numerous challenges and local governments contend with significant financial stress. It remains to be seen whether and how quickly the current round of policy measures will lead to visible improvement in the real estate sector.

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