China’s unworkable housing bailout math prolongs crisis

(Bloomberg) — In May, China’s central government urged more than 200 cities to buy unsold homes to reduce oversupply. More than three months later, only 29 have heeded the call.

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The glacial pace of implementation — driven in large part by the plan’s unattractive economics for local governments — underscores the challenge facing President Xi Jinping as he tries to stem a record decline in property that threatens to undermine the country’s growth goals.

The plan was a key part of the government’s attempt to support the real estate sector while achieving Xi’s goal of creating more affordable housing. The disappointing progress raises pressure for stronger measures as China tries to deal with 382 million square meters of excess inventory, the size of Detroit.

“Local governments have made slow progress,” Ding Zu Yu, president of real estate information platform Shanghai CRIC Info Tech Co., wrote in a report in late August. Purchases accounted for just 1.9 percent of unsold apartments nationwide in July, Ding estimates.

Local bureaucrats are reconciling demands from Beijing while trying to be prudent about costs. Buying apartments right now doesn’t make financial sense for these officials because apartment prices are expected to drop at least another 30 percent in major cities before leveling off, according to Jefferies Financial Group Inc.

Estimated returns from converting inventory into affordable housing are also below the cost of financing. Rental yields in China’s Tier 1 cities averaged just 1.4 percent in 2023, compared with the central bank’s funding rate of 1.75 percent, according to Macquarie Group Ltd.

Several cities have proposed resorting to hard negotiations to minimize their risks, raising doubts that struggling developers would be willing to sell their inventory. In southern Guangdong, the city of Foshan proposed to buy at no more than 50 percent of the prices of similar projects nearby. In the same province, the city of Dongguan plans to price affordable housing at about 50 percent of the value of new homes in a survey, meaning purchase costs would be even lower than that.

The potential for improved returns only exists if the unsold homes were bought at a significant discount, said Tyran Kam, senior director for Asia-Pacific Corporate Ratings at Fitch. But local authorities may also be wary of doing so because of the “socio-political repercussions for local landlords”, he said.

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The move risks further straining local finances that are already on shaky ground. Regional governments’ ability to boost growth has been undermined by a record drop in revenue from land sales, with their budget spending falling in the first seven months. Among all 31 provinces and municipalities, only Shanghai recorded a fiscal surplus in the first half of the year.

“We do not expect a broad rollout of the purchase program due to the lack of funding and the fact that banks and state-owned firms have to bear all the credit and investment risks,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC . .

A Bloomberg index of major Chinese developers fell as much as 1 percent on Wednesday to its lowest level since late April. That followed a sharp drop the previous day after some builders were pulled from a program that links the Shanghai and Shenzhen bourses to the Hong Kong bourse.

Central Bank Program

After the People’s Bank of China unveiled the initiative in May, the central bank called on more than 200 cities to advance the plan, according to a state media report. The following month, the housing ministry pushed for the program to be extended to counties, meaning 387 lower prefectures were encouraged to join.

Authorities in at least 60 cities have expressed support for the initiative, according to China Index Holdings. But not many have announced detailed rules to pave the way for implementation, said its research director Chen Wenjing.

While government buying of housing stock is widely seen as a key step towards reducing the glut, take-up of central bank funding support has also been low.

Only 12.1 billion yuan ($1.7 billion), or 4 percent of the PBOC’s 300 billion yuan lending program, had been used at the end of June, public data showed.

The limited use of existing financing programs signals that income and cash flow from social housing is “insufficient” to cover its associated debt, Fitch Ratings analysts wrote in an Aug. 29 note.

Analysts have also been skeptical about whether the central bank’s funding is enough, as it is only a fraction of the 1 trillion yuan to 5 trillion yuan that is needed to address the supply-demand mismatch.

SEE: Inside China’s housing crisis

To address financing concerns, China is considering allowing local governments to use special loans to buy excess housing units, which would give them access to up to 1.6 trillion yuan in financing, a Bloomberg reported last month. That would be more than enough to fund the home buying program, which will not exceed 1 trillion yuan for 2024-2025, according to Bloomberg Intelligence.

Relaxation rules

Stringent procurement requirements also added to the challenges. In May, a suburban neighborhood in Hangzhou stipulated that potential targets be completed in block assets with sufficient parking space. Chongqing requires building selections to have a subway station, school and hospital within one kilometer.

However, other cities with similar demands are lowering the bar. In August, the southern tech hub of Shenzhen stopped requiring target assets to be fully built. The city of Zhaoqing in southern Guangdong province has stopped limiting purchases to block buildings. The city of Shangqiu in central Henan province has lowered its location standards.

“More cities are likely to relax their rules to expand the pool of potential targets,” Ding wrote.

But for now, China may struggle to sell its bailout plan to local governments, Bloomberg Intelligence analyst Kristy Hung said. “The poor rental yield hardly justifies the risk.”

(Updates with stock reaction in tenth paragraph.)

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