China’s Efforts to End Property Crisis Face Significant Challenges

Ambitious Measures

The new rescue package centers on a policy tested in major cities: local governments buying unsold homes from developers and converting them into affordable housing. This initiative includes reducing mortgage interest rates and down-payment ratios, along with 300 billion yuan ($41.5 billion) in central bank funding to support state purchases of unsold properties.

The announcement followed an April meeting of the Politburo, China’s top ruling body, highlighting the urgency Beijing places on stabilizing the property sector to revive growth in the world's second-largest economy.

“The policymakers recognize the urgency to prevent an outright property crisis,” said Zhaopeng Xing, senior China strategist at ANZ Research. “The new rescue plan demonstrates the policymakers’ resolution to turn things around.”

Scope and Funding Concerns

Despite the urgency, experts warn that the current package might be insufficient. According to Goldman Sachs, the total value of unsold homes, unfinished projects, and unused land in China is approximately 30 trillion yuan ($4.1 trillion). Reducing the housing supply to 2018 levels, when the real estate boom peaked, may require over 7 trillion yuan ($967 billion) for all cities, far exceeding the announced funding.

Even with the economy growing faster than expected early this year, the real estate sector, which once contributed up to 30% of economic activity, continues to drag down overall growth.

Implementation Challenges

There is also uncertainty about the implementation of government purchases and funding sources. Tao Ling, deputy governor of the People’s Bank of China (PBOC), mentioned that the relending program could support 500 billion yuan ($69 billion) worth of bank loans. However, analysts estimate that clearing the backlog of empty or unfinished homes could require hundreds of billions of dollars.

Ting Lu, chief China economist at Nomura, estimates that at least 3.2 trillion yuan ($442 billion) would be needed to finish construction on 20 million pre-sold homes that remain unbuilt.

Helen Qiao, chief economist for Greater China at Bank of America, described the 500 billion yuan funding as “underwhelming” and unlikely to significantly reduce the inventory of empty or unfinished homes without further expansion.

Financial Constraints

Local governments face significant challenges in funding these purchases. The Housing Ministry suggested that local state-owned enterprises could help buy unsold homes. However, local government financing vehicles (LGFVs), already burdened with massive debt, are prohibited from making such purchases.

Chinese cities are heavily indebted, with around $15 trillion in debt, much of it hidden, accumulated from pandemic-related spending and infrastructure projects. The housing market slump has exacerbated financial woes, as land sales typically account for more than 40% of local government revenue. This debt distress has forced cities to slash spending, even suspending basic services.

“It’s debatable whether it’s a good idea to put more debt on already highly-leveraged local governments,” said Jing Liu and Taylor Wang, China economists for HSBC.

Long-Term Solutions

Addressing the oversupply of unsold homes is only the first step. According to Goldman analysts, the government needs to bail out developers and help them complete pre-sold homes to maintain social stability and prevent further declines in new home sales.

The second and third steps involve boosting housing demand and mitigating the contraction in property construction, requiring more detailed measures to revive consumer confidence and housing prices.

External pressures, such as new tariffs from the US and potentially the European Union, further complicate the situation. Former President Donald Trump has threatened even higher tariffs if re-elected, which could significantly impact China’s growth.

“The rescue is not a game-changer for low-tier cities’ housing, which will likely remain depressed,” said Michelle Lam and Wei Yao, China economists at Société Générale. They suggest that the plan needs to be expanded with more detailed policies. However, they acknowledged that Beijing's bold initiative could help stabilize expectations and reduce the risk of China sliding into a deflationary spiral like Japan.

“This might be the beginning of the end of China’s housing crisis,” they concluded.