MNI: China's Housing Trade-ins Will Struggle To Reverse Downturn

Plans for more Chinese cities to launch trade-in schemes aimed at boosting the stagnant real-estate market will likely not reverse the downturn due to its limited scale, particularly as buyers await prices to bottom, advisors and analysts told MNI.

Pointing to plans by at least 30 cities that encourage house replacements, Xie Yifeng, dean at the China Urban Real Estate Research Institute and a housing ministry consultant, noted more will follow, especially the remaining tier-one metropolises following Shenzhen’s decision to launch a trade-in programme last week.

But such campaigns – which offer subsidies, preferential loans and taxes, better resale promotions with the help of developers and agencies, or direct acquisitions by developers and state-owned enterprises – will likely not reverse the downward trend in the short term given the limited number of housing projects included, he added.

The schemes, however, will likely help improve market expectations and reduce inventory marginally, Xie continued.

STATE BUYING

Upper tier-two city Zhengzhou in early April allowed its local-government financing vehicle to buy and transform established 20-year-old or less homes into affordable rental housing, aiming to complete 5,000 units this year – considered the largest project of its kind to date.

However, Xie believes authorities will find it difficult to popularise such a model due to the significant funding support required. The payment cycle remains uncertain as acquired housing may not be rented out promptly, he added. The value of the collateral may also turn some banks with low-risk appetites away, as a standard evaluation system for old homes has not been established, Xie continued.

Yan Yuejin, director at the E-house China Research and Development Institution, agreed the main obstacle lies in the pricing of second-hand houses. Property owners fear agencies will force hefty discounts on old homes amid poor market sentiment, while any overvaluing by SOEs who acquire the houses will drive increased fiscal pressure or inflated valuations of state-owned assets, he noted, suggesting joint valuation by several agencies and anchoring price to surrounding house markets will act as necessary safeguards.

Li Yujia, chief research fellow at Guangdong Urban & Rural Planning and Design Institute, believes government should avoid stepping into house sales directly due to its fiscal strength, debt level and lack of market intelligence, and instead build a trustworthy platform, reduce transaction costs and increase the discount rate for new home purchases included in the scheme.

PRICE BOTTOM

While second-hand housing markets have shown stronger performance than new homes this year, the average reselling cycle still takes about 300 days.

Xie noted home prices in core areas of first-tier cities have shown signs of bottoming out. Some housing projects have raised prices and sales of luxury properties are picking up rapidly, he added.

But home prices in mega-city suburbs are yet to find a floor, Xie continued. All first-tier cities should relax suburban home-purchase limits within the year, he added. (See MNI EM: China To Continue Housing Relaxation As Developers Suffer)

For smaller cities, Xie estimates price adjustment will continue until 2025.

In March, the price index of new homes in first-tier cities fell 0.2% m/m, narrowing by 0.1 percentage point from the previous month, while that of second- and third-tier cities fell 0.3% and 0.4%, flat compared to February.