China’s Real Estate Crisis: Can Socialist Ideas Rescue Its Dire State?

Despite the Chinese government’s attempts to salvage the market, investors remain spooked. Full story. 

What’s Happening?

As home prices in China continue to fall and more developers are facing bankruptcy (thanks to an abundance of available properties), people are doubting whether the country’s real estate will ever be financially feasible again. 

A Drop in House Prices

As of April this year, the prices of new homes in 70 Chinese cities, not including subsidized housing, dropped by 0.7%. According to the National Bureau of Statistics (NBS), this marks the steepest drop since October 2014. 

Scary Stats

As for existing homes, their values decreased by 1%, which is the sharpest drop since China kicked off its new method of collecting data back in 2011. 

What About Investments?

Statistics on property investments claim a drop of 10.1% compared to a year ago. For the same period, new property sales plummeted 28%. 

A Failed Attempt

In May, the People’s Bank of China attempted to revive the country’s house prices by scrapping the minimum rate of interest. Down-payment ratios were also lowered to 15% for first-time buyers, and to 25% for second homes. 

Damage Control

In addition, authorities also facilitated 300 billion yuan ($41.35 billion) for clearing massive housing inventory, slicing payments, and easing mortgage regulations. 

Too Little Too Late?

However, analysts feel these attempts might not have the desired outcome and that easing home-purchase restrictions in big cities might further reduce property purchasing in smaller cities. 

A Word From the Economists

Senior Economist at the Economist Intelligence Unit, Xu Tianchen, said: “The latest policies have boosted the second-hand home market in major cities, but the liquidity problem of real estate enterprises has not yet been eased and the confidence crisis in the new-home market has not yet been resolved”.

A Bad Year

Since the property market went into freefall in 2020, thanks to the pandemic and a sudden regulatory clampdown on indebted lenders, policymakers have been hard at work to minimize the glut of housing and support debt-laden developers.  

The New Strategy

Under the control of the Communist Party, the new strategy is to take over a bigger portion of the market, which has been dominated by the private sector for years. And as per policy advisers and recent government announcements, two major programs make up the foundation of this strategy. 

No. 1

First, the state is to buy up distressed private-market projects and transform them into homes that can be rented out, or sold, by the government. 

No. 2

Second, the state will build more subsidized housing for low- and middle-income families. 

A Big Jump

According to the policy advisers, the plan is to boost the share of state-built housing for low-cost rental or sale under restricted conditions from about 5% or so to a minimum of 30% of China’s housing stock.

According to Plan

This perfectly lines up with Xi Jinping’s bigger vision of not only expanding party control over the economy but also reining in the private sector. 

A Work in Progress

Vice Premier He Lifeng, Xi’s top economic policy aide, is still working out the details on how to execute the new strategy. Economists have warned that the plan, if viable at all, might take years to achieve. 

A Costly Endeavor

Some analysts have stated that the costs associated with such a project would be gigantic: possibly up to $280 billion annually for the next five years, totaling about $1.4 trillion. 

Could It Work?

A finance professor at Peking University, Michael Pettis, claims that if the government does manage to properly improve affordable housing, “it will represent the kind of transfer to the poor households that China urgently needs”. People would then be able to spend more on other things. However, he added that it’s way too early to predict if the plan would work or not. 

Not All Are Optimistic

Another finance professor, this time at the University of Hong Kong, Zhiwu Chen, is more skeptical. Talking about China’s new housing strategy, he compared it to the way Beijing makes use of its so-called “national team” of state funds to buy equities to sustain the miserable stock market. 

Not All Bad News

Fortunately, other parts of the Chinese economy painted a more optimistic picture. Retail sales, for example, shot up 3.7% in May after accelerating from a 15-month low of 2.3% gain in April, beating the market forecasts. 

Thanks To What?

Much of this boost is thanks to a massive government trade-in program for used cars and old home appliances, which is aimed at encouraging domestic consumption. 

Remaining Hopeful

HSBC analysts claim: “While China’s growth remains uneven, we think more policy support is likely to come through to help keep growth on track for this year’s GDP growth target (of around 5%)”. They added that, “More attention will turn towards next month’s Third Plenum (of the Communist Party) which will highlight economic reforms for the coming years”.

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The content of this article is for informational purposes only and does not constitute or replace professional financial advice.

For transparency, this content was partly developed with AI assistance and carefully curated by an experienced editor to be informative and ensure accuracy.