Beijing has launched its most ambitious plan yet to rescue its property market, a development that investors have eagerly anticipated for months. But it's far from certain that the measures will work.
The package is centered around Beijing's adoption of a policy that has already been tested in a major city — asking local governments to buy unsold homes from developers and convert them into social affordable housing. It also features a reduction in mortgage interest rates and downpayment ratios, and more importantly, 300 billion yuan ($41.5 billion) in cheap central bank cash to fund state purchases of unsold properties.
The announcement last week swiftly followed an April meeting of the Politburo, China's top ruling body, indicating that stabilizing the property sector has become a top priority for Beijing as it tries to revive growth in the world's second biggest economy.
"The policymakers recognize the urgency to prevent an outright property crisis," said Zhaopeng Xing, senior China strategist at ANZ Research. "The new rescue plan demonstrates the policymakers' resolution to turn things around."
While the urgency is welcome, experts say the current package may be far too small in scale to be effective and could suffer problems with funding.
According to Goldman Sachs, the total value of unsold homes, unfinished projects and unused land in China is about 30 trillion yuan ($4.1 trillion).
To reduce the supply of housing to levels last seen in 2018, the year the real estate boom peaked, may require more than 7 trillion yuan ($967 billion) for all cities, the Goldman analysts wrote in a Monday research note. That's more than 20 times the amount of funding announced by the People's Bank of China (PBOC).
Even though China's economy expanded faster than expected at the start of this year, growth is being weighed down by the all-important real estate sector, which once accounted for as much as 30% of economic activity.
Despite the flurry of announcements last week, it's still unclear exactly how the government purchases will be implemented and how much is needed to fund the buying. Most importantly, there is lack of clarity on where cash-strapped local governments can get the money to pay for it.
On Friday, Tao Ling, deputy governor of the PBOC, said the relending program could eventually underpin 500 billion yuan ($69 billion) worth of bank loans to support the buying.
But even this figure is much less than what could be needed. Some analysts estimate that hundreds of billions of dollars might be necessary to clear the backlog of millions of empty or unfinished homes across the country.
Ting Lu, chief China economist at Nomura, who has called the country's housing problem "epic," says just finishing construction of pre-sold homes would require at least 3.2 trillion yuan ($442 billion). He estimated that there are currently 20 million pre-sold homes that remain unbuilt.
Helen Qiao, chief economist for Greater China at Bank of America, said the funding size of a maximum of 500 billion yuan was "rather underwhelming."
Without further expansion, the plan was unlikely to make a "notable difference" to the inventory of empty or unfinished homes, she added.
Keep reading about Beijing's plan to save its property sector.
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