MNI: Beijing Called On To Buy Housing Stock Over Local Govs

Local authorities could lack the ability or motivation to absorb unsold housing from developers, risking the success of Beijing’s latest property rescue plan, advisors told MNI, with some calling for a more powerful central government-backed entity to purchase on a larger scale.

Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute, said profitable projects remain the key to whether local authorities fully utilise the new funding tool.

The package announced on May 17 features a CNY300 billion re-lending facility from the People’s Bank of China that will fund bank loans for local state-owned enterprises charged with buying up completed-but-unsold housing stock.

While officials have said the programme can incentivise loans worth CNY500 billion, its size fell short of market expectations. Tianfeng Securities has estimated about CNY7 trillion is required to reduce the destocking cycle to less than 18 months from the current 25.4 months.

Li said a similar PBOC policy tool – the CNY100 billion of targeted loans aimed at supporting eight pilot cities purchase commercial housing for long-term rentals launched in January 2023 – had only led to CNY4.7 billion of loans in the past year due to the difficulty of covering the funding and transformation costs through operations after acquisition.

STRONGER STIMULUS

Guo Xiangyu, director of research at the Research Center for Real Estate Finance at Tsinghua University's PBC School of Finance, a prominent think tank, could not rule out more substantial future measures, such as larger state acquisitions led by the central government should demand fail to react to the current stimulus efforts.

Policy intentions seem aimed at stimulating demand by significantly reducing transaction costs, Guo noted, pointing to the PBOC’s mid-May decision to scrap the nationwide lower limit of housing mortgage interest rates and lower the minimum down-payment ratio to no less than 15% for first- and 25% for second-time buyers. “The 15% down payment is a historical low, even lower than the 20% for conventional loans in the U.S. market,” Guo added.

However, falling home prices and high inventories – estimated at three times the official data of about 700 million square meters if unfinished projects and potential listing of established homes are included – continue to weigh on buyer confidence, he said.

Li noted employment and income expectations, alongside the substantial decline in risk-free interest rates to break through 3%, have dampened appetite, especially when the mortgage rate falls between 3-4%. “It is not worthwhile to pay a high interest for a price-falling asset,” he said, adding household loans, mostly mortgages, contracted CNY516.6 billion in April.

Guo warned another 10% decline on the accumulated 20% fall witnessed over the past three years could lead to the insolvency of many assets with a previous 30% down payment and trigger greater financial risks. (See MNI EM INTERVIEW: China To Contain Property Spillover - Advisor)

The central government will act more efficiently than local authorities who fear incurring extra debt, Guo argued, highlighting the urgent need for house prices to move upward. A state purchase of less than 20% of illiquid inventory could help house prices bottom out and encourage potential buyers, he added, noting long-term and low-cost special government bonds, or part of housing provident funds, could provide ideal funding sources.

Local governments are now also allowed to use special bonds to acquire idle land from developers at reasonable prices. This indicates a positive shift in policy towards supporting developers to stabilise the entire sector, rather than merely rescuing individual projects to ensure delivery, Gua noted.