In May, China’s central government urged over 200 cities to purchase unsold homes in an effort to reduce the oversupply in the property market. More than three months later, just 29 cities have acted on this directive. The sluggish implementation, largely due to the financial impracticality for local governments, highlights the challenges President Xi Jinping faces in tackling a record-breaking property slump that threatens to derail China’s economic growth.
The buyback initiative is a key component of the government’s strategy to stabilize the real estate sector while promoting more affordable housing, a major policy goal of Xi. However, with only 29 cities taking action so far, pressure is mounting for stronger interventions as China grapples with an estimated 382 million square meters of unsold housing—equivalent to the area of Detroit.
“Local governments have made slow progress,” wrote Ding Zu Yu, chairman of real estate information platform Shanghai CRIC Info Tech Co., in a late-August report. As of July, only 1.9% of unsold apartments nationwide had been purchased, according to Ding’s estimates.
Local officials are struggling to balance Beijing’s demands with the need for fiscal caution. Purchasing homes now is financially unsound for many local governments, especially as property prices in major cities are expected to decline by at least 30% before stabilizing, according to Jefferies Financial Group Inc.
Furthermore, the expected returns from converting unsold apartments into affordable housing fall short of the funding costs. In China’s top-tier cities, rental yields averaged just 1.4% in 2023, while the central bank’s funding rate stood at 1.75%, as reported by Macquarie Group Ltd.
Some cities are attempting to mitigate their risks by negotiating steep discounts. In Foshan, a city in southern Guangdong, officials proposed buying homes at no more than 50% of the prices of comparable projects. Dongguan, another city in the same province, plans to price affordable housing at roughly 50% of new home values, potentially lowering acquisition costs even further.
However, even with significant discounts, local governments are hesitant. “Buying unsold homes at a major discount might increase returns,” said Tyran Kam, senior director of Fitch’s Asia-Pacific Corporate Ratings. “But officials are wary of potential backlash from existing homeowners.”
The plan also threatens to strain already fragile local finances. Regional governments, whose budgets have been severely impacted by a historic drop in revenue from land sales, saw their spending shrink during the first seven months of the year. Of the 31 provinces and municipalities in China, only Shanghai recorded a fiscal surplus in the first half of the year.
Given these financial constraints, analysts predict limited expansion of the buyback program. “We don’t expect widespread adoption due to a lack of funding and the fact that banks and state-owned enterprises must bear all the credit and investment risks,” said Zerlina Zeng, senior credit analyst at Creditsights Singapore LLC.
Reflecting the industry’s struggles, a Bloomberg index of major Chinese property developers fell by as much as 1% on Wednesday, reaching its lowest point since April. This followed a sharp decline the previous day after some developers were removed from a key program linking Shanghai, Shenzhen, and Hong Kong exchanges.
Central Bank Initiative and Funding Challenges
Following the People’s Bank of China’s introduction of the plan in May, more than 200 cities were encouraged to participate, according to state media reports. By June, the housing ministry had expanded the program to include 387 additional counties.
While more than 60 cities have expressed support for the plan, few have established clear guidelines for its implementation, said Chen Wenjing, research director at China Index Holdings. State purchasing of unsold housing is seen as a crucial step in alleviating the market glut, but the uptake of central bank funding remains low.
By the end of June, only 12.1 billion yuan ($1.7 billion), or 4% of the 300 billion yuan allocated by the People’s Bank of China, had been used, according to public data. Analysts at Fitch Ratings suggest that the limited use of financing programs points to the insufficient returns from social housing projects to cover associated debts.
Questions have also been raised about whether the central bank’s funds are adequate. The 300 billion yuan relending program is only a fraction of the estimated 1 trillion to 5 trillion yuan needed to correct the supply-demand imbalance.
In response to funding concerns, China is reportedly considering allowing local governments to use special loans to purchase excess housing stock. This could provide up to 1.6 trillion yuan in funding, more than enough to cover the expected cost of the home-buying program for 2024-2025, according to Bloomberg Intelligence.
Relaxing Rules to Boost Uptake
Tight purchasing criteria have also hampered the program’s rollout. For instance, in Hangzhou, a suburban district required target assets to be fully completed and include sufficient parking space. Similarly, Chongqing mandated that selected buildings be within one kilometer of a subway station, school, and hospital.
However, some cities have started to ease these restrictions. In August, Shenzhen, a tech hub in the south, removed the requirement for target assets to be fully completed. Other cities, like Zhaoqing and Shangqiu, have also lowered their standards to increase the number of eligible properties.
“More cities are likely to relax their rules to broaden the pool of potential targets,” Ding noted.
Despite these adjustments, China may continue to struggle with gaining local government buy-in for the home-buyback program. Bloomberg Intelligence analyst Kristy Hung commented, “The minimal rental yields don’t justify the risk for local authorities.”
