Leaders throw spotlight on struggling real estate sector

China's property developers and market watchers are scrambling for cues after the president made a rare comment on the ailing real estate market, stoking hope that more stimulus policies are on the way.

Speaking at a high-level economic meeting on Nov 10, President Xi Jinping said the government needed to "draw down the housing inventory" and "strive to achieve healthy development of the property industry". It was the first time he had commented specifically on the market since October 2013.

The next day, Premier Li Keqiang gave a speech in which he said China's "high housing inventory" problem had not been fixed.

According to analysts, the leaders' comments reflect rising concern over what is the world's largest housing overhang, which has dampened hope of a revival in housing sales and prices, and thus developers' appetite for investment.

Real estate investment growth fell from 12.4 percent last year to a record-low 2 percent in the first 10 months of this year, acting as a drag on GDP growth, which was 6.9 percent. This is particularly concerning for Chinese leaders, as real estate and construction accounted for 15 percent of GDP and one-fourth of fixed-asset investment.

Land sales make up 24 percent of local governments' total revenue, while property-related tax accounts for 40 percent of their tax receipts, according to Moody's Investors Service.

An oversupply of homes has resulted in the sales pickup since April lacking traction. Despite five interest rate cuts this year that have lowered mortgage rates to the lowest level in 30 years, the rise in house prices slowed for the second straight month in October, official statistics show.

Prices in smaller cities are particularly weak, and in some cases even dropping, because inventory levels are much higher than in the largest cities.

Official data show that the number of unsold new homes nationwide by the end of October was up 14 percent compared with a year ago, rising to 437 million square meters. And that is just a tip of the iceberg, as it represents only finished homes. Another 4.93 billion sq m is being built, and no one knows whether they will be sold when complete. Combining the two figures, it effectively means every Chinese citizen faces a 3.92 sq m housing overhang.

Ni Pengfei, a research fellow with the Chinese Academy of Social Sciences, forecasts that cumulative unsold homes will reach 2.2 billion sq m in two years.

One acute problem is that most of the properties are in third- and fourth-tier cities, where home ownership is high. Nonetheless, he says that if 70 percent of migrant workers could buy homes in the cities where they work, the inventory would be depleted.

In addition to relaxing the household registration system and allowing more migrant workers to settle in major cities, policymakers have ample room to maneuver. For example, the down payment requirement for first-time buyers in cities other than Beijing, Shanghai, Shenzhen and Guangzhou was cut from 30 to 25 percent in October, but it is still considered by many to be high.

Ding Xiao, a property analyst with UBS China Equity Research, says the requirement should be further eased to 20 percent, while the requirement could also be lowered in the largest cities.

Authorities could also raise the upper limit on how much Chinese earners can withdraw from the housing provident fund to buy property, Ding said.

The government is changing the way it provides homes to those displaced due to shantytown renovation projects, according to Zhao Luxing, a research fellow with the Ministry of Housing's Policy Research Center. He says that instead of building new homes, local authorities are increasingly urging developers to sell unsold property at a discount to people in need or are directly buying these homes to sell.

That could help to reduce the inventory and is being promoted by the central government. Zhao says the ministry requires these homes to account for no less than 50 percent of the total subsidized supply, which is to be cut to between 80 and 100 million sq m this year.

Next year, the method could include 180 million sq m of inventory, the researcher estimates. Compared with directly purchasing properties, having governments act as brokers is the preferred option because that way they do not need to foot the bill.

Ren Zhiqiang, a real estate tycoon, blames the huge inventory on years of administrative controls on the market by the central government. To reduce it, he says the government must scrap various limits such as on allowing households to buy a third home (the ban was scrapped last year except for in the four largest cities).

zhengyangpeng@chinadaily.com.cn

(China Daily European Weekly 12/04/2015 page21)