China's 'perfect plan' to revive housing market draws sceptics

CHINESE local governments are increasingly turning to a tool used in the last housing downturn to revive the market. Analysts say it's unlikely to work.

Authorities in at least 20 small cities have been allowing households that agree to have their run-down properties demolished to choose so-called "housing vouchers" as compensation, according to a Bloomberg tally of local policies. The vouchers can be used to buy new homes in the private market, and some cities provide cash subsidies as additional incentives.

The latest move marks an effort to recharge shantytown redevelopment and alleviate poverty while also addressing the country's longest-ever housing slump. Such measures previously fuelled robust demand for new residential properties between 2015 and 2018, and were estimated to have contributed to more than one-fifth of home sales in 2017.

But the magic may have little effect this time around, according to Nomura Holdings, CGS-CIMB Securities and Shenwan Hongyuan Securities.

In the last round, the funds were largely financed by money printed by the People's Bank of China. It's unlikely that the central bank will restart the same financing route this time, Shenwan Hongyuan Securities analysts wrote in a note last week.

"It sounds like a perfect plan," but will probably have a very low success rate, Nomura analysts led by chief China economist Lu Ting wrote in a report. The lack of cash support from the central bank means local governments will have to go it alone, and they have limited fire power given their own strained finances, Lu wrote. Also, households are more reluctant to buy homes that may not be completed by cash-strapped developers.

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"We are a bit sceptical about the success of the scheme given the weak financial status of many small cities," though it may help to boost sales "if fully implemented", CGS-CIMB Securities analysts including Raymond Cheng wrote in a note.

China's housing sales have fallen year-on-year for 11 months straight, a record since the nation's private property market began in the 1990s. The persistent downturn is likely to put a big drag on economic growth this year.

Most cities adopting the voucher policy are smaller ones like Changshu and Jiaxing close to Shanghai, while central Henan's provincial capital Zhengzhou followed in late June.

Signs of improvement in the housing market have emerged after local governments eased some buying restrictions and authorities cut interest rates. New-home sales in 17 cities monitored by China Index Holdings surged 89 per cent so far in June from a month earlier.

While the momentum shouldn't be ignored, Lu cautioned that the road to recovery will probably be "quite bumpy" as China sticks to its Covid-Zero policy.

"Chinese households may be unwilling to take out mortgages at a time of slowing growth and elevated uncertainty," Lu said. BLOOMBERG