Construction on a real estate project in Yantai, Shandong province, gets under way on July 8, 2023.
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BEIJING — China is changing its tone on the struggling real estate sector, paving the way for policy support.
Beijing’s crackdown on the once-hot property market has focused on financial risks of speculation and highly indebted developers such as Evergrande. Despite recent government efforts, home sales have slumped as the overall economy slows.
This week, a meeting of top Chinese leaders noted a “great change” in the relationship between supply and demand in the real estate market — and called for policy adjustments. That’s according to a CNBC translation of the Chinese readout of a Politburo meeting on Monday.
The readout also removed the phrase “houses are for living in, not for speculation” — frequently used in China as a mantra for a tight policy on the property market.
“For policymakers, the top property-related risk is no longer financial risk, but recession risk,” said Larry Hu, chief China economist at Macquarie.
“In an extremely top-down system like today’s China, the tone from the top is much more important than specific policy measures,” Hu said. He expects detailed policy announcements in the coming months.
The first time Chinese officials spoke of changes in real estate supply and demand was at a People’s Bank of China press conference on July 14, according to a state media report. Then, the PBOC official hinted at forthcoming property market policies.
This week, the higher-level Politburo meeting readout included similar language.
The statement reflects a “much clearer understanding about the seriousness of the situation,” said Qin Gang, executive director of China real estate research institute ICR. That’s according to a CNBC translation of his Mandarin-language remarks.
“This is a big change,” he said. He expects policies beneficial to the real estate market and consumption will come out in coming days.
The Hang Seng Property Development and Management Index rose by 9.78% on Tuesday. State media indicated relaxation in purchase restrictions could come later this year for China’s smaller cities.
More details needed
While Beijing’s tone is positive, Ricky Tsang, director of corporate ratings at S&P Global Ratings, said he’s watching for practical changes. Those include easing requirements for buying an apartment, lower down-payments and removing price caps.
He still expects property sales to fall this year and next, primarily dragged down by performance in less developed cities.
Residential property sales from July 1 to 20 dropped by more than a third from the same period last month – and one year ago, when China’s Covid controls were still in place, Tsang said, citing industry data published in state media. That’s based on floor space transaction volume.
Real estate investment has also fallen, down by 7.9% in the first half this year. It’s expected to remain low in the near term, according to the National Bureau of Statistics.
That kind of decline isn’t in line with China’s growth targets, said Zong Liang, chief researcher at the Bank of China.
Zong pointed out that policymakers’ overall tone has eased, in contrast to prior preference for greater control. The idea of a property tax didn’t even get a hint in the latest meeting, he said.
He said the Politburo meeting’s removal of a phrase about house speculation means policymakers have achieved a certain level of success — indicating they can move on. That could mean some price volatility might be allowed in segments of the real estate market, but not for properties meant to ensure basic living needs, he added.
Housing affordability is an area of Beijing’s focus, along with education and health care.
Developers’ difficulties
Last year, not only were house prices elevated, but developers had delayed construction on many units due to financing difficulties. Apartments in China are typically sold ahead of completion, and falling sales cut into developers’ cash flows.
So far, the biggest real estate policy change has been this month’s extension of measures to support developers, which were first revealed in November.
Still, “developers are having a hard time raising funds from the equity and bond markets,” said Tommy Wu, senior China economist, Commerzbank.
He expects policy to focus on helping developers get enough funding to complete construction of houses.
“Confidence of potential homebuyers and housing sales could improve in a sustainable manner only when housing completion is on a firm footing,” Wu said. “This in turn would support developers’ funding and their debt repayment more generally and build a virtuous cycle.”
What about defaults?
Worries about China’s real estate market came to the forefront in late 2021 when highly indebted developer Evergrande defaulted.
Moody’s expects far fewer Chinese developers to default this year since many were able to push back maturities to late next year.
In 2022, Moody’s recorded 26 defaults among Chinese real estate developers that it covers – a peak, according to senior vice president Kaven Tsang. He said only one issuer has defaulted in the first half of this year.
But more clarity from Beijing is still needed.
Despite a 70-basis point decline in mortgage rates since the last peak, home prices and transactions still haven’t gone up, said Gary Ng, senior economist, Natixis CIB Asia Pacific.
Ten years ago, “the home price would have gone to the moon already,” he said. “That shows quite clearly there is a confidence issue here.”
