Year in Review: China’s Real Estate Sector in Crisis

04 Jan 2024

China’s real estate sector started 2023 on a promising note after a year-long slump. In the first two months, sales of newly built residential property grew by 3.5% year-on-year to 1.4 trillion yuan ($201 billion), National Bureau of Statistics (NBS) data show, the first positive cumulative growth since December 2021.

However, after the pent-up demand that accumulated during the pandemic was released, the momentum of recovery faltered and sales resumed their decline. Concerned about the impact of the slump on the economy — property and related industries accounted for around 13% to 14% of the country’s GDP in 2022, according to the NBS — policymakers stepped up efforts to kick-start the sector.

On the supply side, the deleveraging policy that had crippled property developers was reversed to encourage them to complete partially built homes, buy land and boost housing starts. On the demand side, administrative restrictions on homebuying, such as high down payments and limits on the number of properties families could purchase, were eased or even scrapped altogether in some cities. Banks also lowered mortgage interest rates for new borrowers in June, cutting the benchmark rate used to price such loans by 10 basis points to 4.2%.

The campaign to support the housing market intensified in July, when a meeting of the Politburo, the country’s top decision-making body chaired by President Xi Jinping, called for property policies to be adjusted and improved to “facilitate the steady and sound development of the real estate market,” signaling a further easing of restrictions.

The Politburo’s guidance led cities across the country to introduce more measures to revive demand for homes. In September, Guangzhou scrapped limits on the number of homes a household could buy in five of the metropolis’ 11 districts and some parts of Baiyun district where the airport is located.

Lower mortgage rates

Financial regulators also took action. In early August, the People’s Bank of China (PBOC) said that it would ask lenders to adjust mortgage rates for existing borrowers. At the end of August, the central bank and the national administration of financial regulation (NAFR) jointly issued new policies that included three major measures: lowering down payment ratios, lowering minimum second-home mortgage rates and lowering rates on existing first-home mortgages. Guangzhou, Shenzhen, Beijing, and Shanghai loosened the definition of a “first-time homebuyer” so that more buyers could benefit from the new measures.

In a November report, the central bank disclosed that 95 cities had lowered the floor on first-home mortgage rates and 24 localities had ditched the minimum limit altogether.

The slew of support measures helped push overall new-home sales in September to 89.6 million square meters (964.4 million square feet), up from 61.9 million square meters the previous month, NBS data show. However, the effect was short-lived, and the downward trend resumed in October, traditionally a peak season, with sales falling to 66.2 million square meters. In November, the figure dropped further to 65.8 million square meters.

In November, the price slump also deepened with 59 of the 70 major cities tracked by the NBS reporting a month-on-month decline in new-home prices, the joint-highest number since 2015.

Weak demand for new homes added to the financial pressure on property developers, who had traditionally relied heavily on cash flow from presales to fund their building activities. The continuing impact of the three red lines policy introduced in 2020 to lower property developers’ leverage squeezed liquidity even more, leaving them with insufficient funds to complete hundreds of housing projects under construction.

The PBOC and the now-defunct China Banking and Insurance Regulatory Commission rolled out additional support for the property sector and developers in November 2022, with a 16-point policy package that called on financial institutions to show flexibility and negotiate with property developers to extend loan repayments, adjust repayment arrangements, and use other means to help them complete projects under construction.

As part of the package, a new lending program was introduced providing 200 billion yuan to commercial banks at zero interest rates to encourage them to lend to cash-strapped developers to complete unfinished projects. But banks were reluctant to participate amid concerns over the risks, and as of end-March 2023, when the program was due to end, only 500 million yuan of the quota had been used, according to PBOC data.

Reviving the market

By end-June, the number remained unchanged and in August the PBOC announced the program would be extended until May 2024. Banks have since become slightly more willing to use the cheap loans and as of end-September, 5.6 billion yuan had been deployed, although that was still only 2.8% of the funds available.

Recognizing that lack of cash was still a significant impediment to reviving the property market, policymakers pledged at the twice-a-decade Central Financial Work Conference (CFWC) held on Oct. 30 and 31 to improve property companies’ access to funding. They also called for the “reasonable” financing needs of all developers to be met and for private developers to be given equal treatment with their state-owned peers.

The central bank, the NAFR and the China Securities Regulatory Commission responded quickly, holding a meeting with developers in early November to discuss their financing needs. On Nov. 17, they met with China’s biggest banks, as well as major brokerages and distressed asset managers, telling them to meet all “reasonable” funding needs of property firms, including bond issuance and equity financing.

The regulators also told banks they would need to meet three new requirements for lending to the real estate sector — keep their real estate loan growth at a level no lower than the banking industry’s overall loan growth for the sector, maintain loan growth to non-state-owned developers no lower than the pace of lending to all developers, and keep mortgage growth to individuals buying property from the former no lower than their overall mortgage growth, people who attended the meeting told Caixin.

The CFWC also pledged to build a “new model of real estate development” that would include what it called “three major projects” to support the industry — building affordable housing, renovating urban villages and constructing public infrastructure that can be used for both normal and emergency situations.

Many analysts say that in the short term, the key to resolving the property crisis is to address the massive overhang of unsold properties, restore confidence among homebuyers, and stabilize market expectations about housing prices. Banks need to be offered more incentives to lend to property developers who will face significant financial pressure in 2024.