Analysts Claim China's Housing Rescue Effort Insufficient to Resolve Crisis

Analysts believe China's recent measures to rescue the housing market are too limited to effectively end the crisis. They argue that more substantial actions are required to stabilize the market and address underlying issues.

To increase bank lending to developers and ensure the completion of existing projects, officials are intensifying a "white list" initiative that identifies developments worthy of support.

China’s latest housing initiative targets vacant properties, a significant issue in the nearly three-year-long crisis. However, analysts argue that the measures are too modest to end the downturn.

The decline in new home sales in China has accelerated, with households increasingly preferring the secondary market. This shift has increased the stock of unsold homes and empty land to the highest level in years, discouraging new construction and threatening more defaults by developers, including large state-owned firms.

The support package announced on Friday includes a 300 billion yuan ($42 billion) facility from the People’s Bank of China to fund bank loans for state companies tasked with purchasing completed but unsold housing stock. Economists are concerned about the measure's limited size compared to the stock of unsold housing and the risk of incomplete implementation.

Officials said the central bank program could incentivize bank loans worth 500 billion yuan, which addresses only a fraction of the value of vacant apartments in China, estimated to be in the trillions of yuan.

The facility is "well short" of what is needed to ease financial strains among developers, said Rory Green, chief China economist at TS Lombard.

The program, which tasks local governments with converting the apartments into affordable housing, received high-profile backing from President Xi Jinping’s economic advisor on Friday. Despite this, there are doubts about whether banks will fully utilize the facility. Commercial lenders’ involvement may "limit the speed and efficacy of fund deployment," Green said.

A previous PBOC lending program for commercial banks aimed at rental housing projects saw low participation, with only 2% of the funds utilized. The new initiative has been trialed in eight cities and was most effective in areas with population inflows, a condition not met by all cities.

Goldman Sachs Group Inc. economists, led by Lisheng Wang, noted that any substantial housing easing measures, including those for destocking, would require significantly more funding than is currently available. Their research indicates that returning outstanding housing inventory to 2018 levels would require 7.7 trillion yuan.

Additionally, a program encouraging local governments to purchase unused land from developers faces challenges. Many regions are financially strained, and officials cautioned on Friday that such efforts should not increase local government debt risks.

Regional authorities will be allowed to allocate part of their annual 3.9 trillion yuan bond borrowing quota for the new housing initiative, although much of this has already been designated for infrastructure projects.

Adam Wolfe, an emerging markets economist at Absolute Strategy Research, noted the uncertainty about whether local governments will be willing to pay prices close to what developers paid for the land. “If developers have to recognize a loss on their land banks, then they might have to acknowledge solvency issues, not just cash flow problems,” Wolfe said.

To encourage bank lending to developers for completing existing projects, officials are reinforcing a "white list" initiative that identifies developments deserving support. Since its introduction in January, the approved lending under this plan has reached over 900 billion yuan, according to officials.

However, these funds don’t appear to be reaching property companies, which secured less than 600 billion yuan in construction loans during the first four months of the year, a 9% decrease from the previous year, per the country’s statistics bureau.

The white-list program is limited by commercial banks' concerns about developer defaults affecting their bottom line. Similar issues affect new measures allowing banks to lower mortgage rates and down-payment requirements.

Lenders have already reduced mortgage rates to historic lows and may be hesitant to make further cuts. “The impact of this policy will be limited by banks’ squeezed interest rate margins,” said Serena Zhou, senior China economist at Mizuho Securities Asia Ltd.

Lower mortgage rates might lead households to buy existing properties rather than new ones, as existing home prices have fallen more and there are no delivery concerns. Last year, sales of existing homes in China exceeded new homes by area for the first time, highlighting a shift in buying habits that means less cash for developers.

Cutting mortgage rates to stimulate sales might work in larger cities with higher housing demand but not in smaller cities where rates are already very low, said Houze Song, an economist at the Paulson Institute.

“The new policies may boost property sales for a few months,” Song added, “but I doubt it will be enough to reverse the trend.”

Source: cnbctv18