Construction on a real estate project in Yantai, Shandong province, commenced on July 8, 2023.
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BEIJING — China is shifting its stance on the struggling real estate sector, signaling potential policy support.
Beijing has been cracking down on the once-booming property market, focusing on the financial risks associated with speculation and highly indebted developers like Evergrande. However, despite government efforts, home sales have declined amid a slowdown in the overall economy.
This week, a meeting of top Chinese leaders acknowledged a “significant change” in the supply-demand dynamics of the real estate market and called for policy adjustments. This information was extracted from the Chinese readout of a Politburo meeting on Monday, as translated by CNBC.
The readout also excluded the phrase “houses are for living in, not for speculation” which had been frequently used in China to support a stringent policy on the property market.
“The primary property-related risk for policymakers is no longer financial, but rather a recession,” said Larry Hu, chief China economist at Macquarie.
“In an extremely top-down system like today’s China, the messaging from the top echelons is more crucial than specific policy measures,” stated Hu, anticipating detailed policy announcements in the coming months.
The first mention of changes in real estate supply and demand by Chinese officials occurred during a People’s Bank of China press conference on July 14, as per a state media report. The PBOC official hinted at forthcoming property market policies at the time.
This week, similar language was included in the readout of the higher-level Politburo meeting.
The statement demonstrates a “considerably clearer understanding of the seriousness of the situation,” according to Qin Gang, executive director of China real estate research institute ICR. These remarks were translated by CNBC from Mandarin.
“This marks a significant change,” he added, anticipating policies that will benefit the real estate market and consumption to be revealed in the coming days.
The Hang Seng Property Development and Management Index saw a 9.78% increase on Tuesday. State media hinted at potential relaxation in purchase restrictions for smaller cities in China later this year.
While Beijing’s tone is optimistic, Ricky Tsang, director of corporate ratings at S&P Global Ratings, emphasizes the importance of practical changes. These may include easing requirements for purchasing an apartment, reducing down-payments, and eliminating price caps.
Tsang still expects property sales to decline this year and next, primarily due to performance in less developed cities.
Based on industry data published in state media, residential property sales from July 1 to 20 have dropped by over a third compared to the same period last month and one year ago, when China’s Covid restrictions were still in effect, Tsang noted.
Real estate investment has also experienced a 7.9% decline in the first half of this year, with expectations of remaining low in the near term, according to the National Bureau of Statistics.
Zong Liang, chief researcher at the Bank of China, points out that the overall tone of policymakers has eased, in contrast to their previous preference for greater control. The latest meeting did not even hint at the idea of implementing a property tax, Zong added.
He stated that the removal of a phrase related to house speculation from the Politburo meeting suggests that policymakers have achieved a certain level of success, indicating the possibility of allowing some price volatility in certain segments of the real estate market, while safeguarding properties meant for basic living needs.
Beijing is focusing on housing affordability, along with education and healthcare.
Developers’ challenges
Last year, as house prices soared, developers faced delays in construction due to financing difficulties. Apartments in China are typically sold before completion, and declining sales have affected developers’ cash flows.
So far, the most significant policy change in the real estate sector has been the extension of support measures for developers, first announced in November.
However, according to Tommy Wu, senior China economist at Commerzbank, “developers continue to struggle to raise funds from equity and bond markets.”
Wu expects policy interventions to focus on assisting developers in securing sufficient funding to complete house construction.
“The confidence of potential homebuyers and housing sales can only improve sustainably when housing completion is on solid ground,” Wu stated. “This, in turn, will support developers’ funding and debt repayment, ultimately creating a positive cycle.”
What about defaults?
Concerns about China’s real estate market arose in late 2021 following the default of highly indebted developer Evergrande.
Moody’s expects a significant decrease in the number of Chinese developers defaulting this year, as many have successfully extended their maturities until late next year.
In 2022, Moody’s recorded 26 defaults among Chinese real estate developers within its coverage—a high point, according to senior vice president Kaven Tsang. He noted that only one issuer has defaulted in the first half of this year.
However, greater clarity from Beijing is still needed.
Despite a 70-basis point decline in mortgage rates since the previous peak, home prices and transactions have not increased, indicating a confidence issue, according to Gary Ng, senior economist at Natixis CIB Asia Pacific.
“Ten years ago, the home prices would have skyrocketed by now,” he said. “This clearly indicates a lack of confidence in the market.”
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