China’s property package should be seen as a way to shrink sector
BEIJING’S latest package of measures for its depressed real estate sector is being panned. It seems, even now, not enough is being done to mount a proper rescue. Among other things, municipalities have been told to buy up unsold homes from stricken developers. These units would be turned into low-cost housing and sold-off or, failing that, rented out. China’s central bank is to pump in 300 billion yuan (S$55.8 billion) in loans to enable local governments to buy up those unsold homes. From available evidence, the plan looks to have been road-tested in the megacity of Hangzhou. In the meantime, the country’s top economic planners are exploring a new model for the beleaguered sector.
Not good enough, critics argue. The total value of unsold homes, unfinished projects and unused land in China amounts to about 30 trillion yuan, it is claimed. Getting back to 2018 levels – the year the real estate boom peaked – would require more than 20 times the amount available under this scheme, it is argued. The real estate sector accounted for about 30 per cent of China’s gross domestic product at the peak of the market.
All of these pronouncements sound very learned and ominous. But how are those figures derived? The sum total of all non-performing bank loans to the sector? So why don’t the banks just seize the collateral? On close examination it becomes clear that there is an issue of setting a price for unsaleable property and abandoned projects.
Regardless of the initial production cost, does an apartment still have a market price if no one wants to buy? There are many abandoned, and now worthless, mega projects around the world. For instance, Johor’s Forest City project was supposed to eventually house 700,0000 affluent residents, but now stands mostly empty and silent. Fancy a deluxe apartment there? What are you prepared to pay for it?
The problem in China was, as the International Monetary Fund pointed out in a recent country report, home prices became significantly inflated relative to household incomes in the decade before the pandemic, in part because consumers preferred to invest their considerable savings in real estate, given the scarcity of attractive alternative savings options. And everyone expected ever-rising home and land prices.
This in turn allowed property developers to borrow heavily, including from some foreign banks. The land sales provided crucial revenue for local governments. In other words, it was another iteration of the tulip mania when everyone rushed to invest in, and profit from, the flowers. It is said that at its height in 1630s Holland, a single bulb of the most precious tulip cost more than a sumptuous house on Amsterdam’s grandest canal.
As long ago as 2016, Chinese leaders decided that that housing should be for accommodation and not an instrument for speculation. The current rescue package indicates that there is no going back: investors, developers and their financial backers will have to take a hit. This includes foreign lenders who seem to be behind the current clamour for a more generous rescue package. But rather then a rescue package, perhaps it should be seen as controlled demolition to shrink the sector.
There is risk in any venture. Investors, developers and banks have to live with their decisions. In this case, they should find solace in the fact that completed housing projects that are now going to seed would be given a new charitable purpose.
