Fact Check
Propping up property?
By Lan Xinzhen  ·  2023-01-16  ·   Source: NO.3 JANUARY 19, 2023

The People's Bank of China, the country's central bank, and the China Banking and Insurance Regulatory Commission jointly issued a notice on January 5, allowing local governments to implement differentiated credit policies suited to their local circumstances.

The notice states policies such as setting city-specific down payment ratios or mortgage rate floors. Cities that see prices for newly built homes drop for three months straight may temporarily maintain, revise down or even cancel abovementioned floors for first-time home buyers. Ni Hong, Minister of Housing and Urban-Rural Development, echoed the notice on January 6, adding that some of those planning to buy a second home will also enjoy favorable policies, such as families with more than one child. These gestures are considered signals reinforcing corporate confidence in, and thus spurring on, China's real estate market.

Currently, China's property sector has hit its lowest point since 1998, the year the country initiated the market-oriented reform of its housing system. Today, property prices on the whole remain in a downward spiral. From January to November 2022, 100 major cities saw their house prices inch up by only 0.6 percent in total, the slowest pace since 2015. In the second half of 2022, specifically, prices of newly built homes in these cities declined and residential consumption demand for housing went quiet. In the first 11 months of 2022, these cities saw monthly average floor space of sold apartments drop 36.8 percent year on year, reaching the lowest point since 2015. Moreover, property developers were reluctant to make new investments. Floor space of new construction sites plummeted 38.9 percent year on year, and that of finished apartments went down 19 percent.

Since the market-oriented reform in 1998, China's house prices began surging. To remove property market bubbles, particularly in the aftermath of the 2008 global financial crisis triggered by the U.S. subprime mortgage crisis, the Chinese Government began to regulate the market through policies like property-purchase limitations and loan restrictions.

A cooling property market points to these regulatory policies being successful. However, as the sector is a pillar of China's national economy, a flat property market risks causing ripple effects. For example, downstream businesses in steel, cement and furniture may very well go down with it.

Plus, financial malaise plagues a large percentage of developers. Around 70 percent of the top 50 private-sector property developers are battling tight cash flows and some have even defaulted on their debts. A typical example is that of Evergrande, the second largest property developer in China by sales, whose missed payments on some of its debts jolted the country's property market last year.

In this context, new policies to revive the property sector are indeed the order of the day. The Chinese economy is still reeling from the shocks it endured in the past three years. Despite encouraging policies and measures, the country's overall economy remains below pre-pandemic levels in many aspects. Lowering payment ratios and mortgage rates for first-time homebuyers will help relieve residents of their financial burdens and make it possible for more people in real need of housing to purchase a place. As a result, the property sector will again serve as a crucial driver for China's economic growth.

China's stable financial sector provides the foundation for this round of property market stimulus policies. According to statistics from the central bank, by the end of the third quarter of 2022, the total loan balance denominated in renminbi in various financial institutions had been registered at 210.76 trillion yuan ($31.19 trillion), up 11.2 percent year on year, of which 53.29 trillion yuan ($7.89 trillion) were classified as property loan balance, up 3.2 percent year on year. With a near-zero non-performing loan ratio, bubbles in the property market, a big concern for years, have already been largely removed. Stable real estate finance makes stimulus policies more feasible.

New college graduates, residents in newly urbanized areas and residents of longstanding cities are always eager for better housing conditions. Plus, the pent-up housing demand of the past three years is expected to be unleashed at long last. Standing at such an intersection, more relaxed policies are most likely to prop up China's slouching property sector.

Copyedited by Elsbeth van Paridon

Comments to lanxinzhen@cicgamericas.com

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