This peer-reviewed article was written exclusively for the East Asia Forum in May 2024.
China’s real estate industry has been grappling with big challenges in 2023 and 2024. In the first quarter of 2024, nationwide real estate development fell across key indexes Investment totaled 2.2 trillion RMB (US$303.5 billion), a year-on-year decrease of 9.5%. New home sales were 226.7 million square meters, down 19.4% year-on-year, with residential sales falling by 23.4 %. New home sales amounted to 2.1 trillion RMB (US$290 billion), down by 27.6%, with residential sales dropping by 30.7%. At the end of March 2024, the area of unsold residential housing grew by 23.9%.
To prop up the real estate industry to avert systemic damage to the economy, given the political, economic, and social stakes involved, the national government unveiled a big package of measures in mid-May 2024. These include asking local governments to buy up inventories and easing purchase rules through the People’s Bank of China, such as cutting down payments and mortgage rates.
These policy measures are seen as unprecedented, and they are expected to have some positive effects on the country’s real estate industry.
For homebuyers in large cities, the reduction in down payments and home lending rates may slightly alleviate financial burdens. In Beijing, the down payment for an ordinary residential apartment might be reduced by hundreds of thousands of renminbi. A 1 million RMB (US$138,000), 30-year first-time home loan from the housing provident fund will see total interest costs reduced by 48,500 RMB (US$6,692). According to monitoring by the China Index Academy, the first weekend after the new policy was introduced saw a measurable increase in visits to sales offices, with new home sales in 30 key cities increasing by 8.5% week-on-week.
Better managing idle land will also help cities with high commercial housing inventories. The government can purchase commercial housing and repurpose it as affordable housing at reasonable prices. This may help financially troubled real estate companies. Increasing the supply of affordable housing could improve livelihoods and promote local economic development, as China’s latest round of affordable housing construction targets families with low incomes, as well as technicians, teachers, and medical professionals.
Yet the strength of these measures will hardly resolve the real estate sector's fundamental problems.
On the supply side, estimates suggest that reducing the de-stocking cycle by half would require several trillion RMB. Even 300 billion RMB (US$41.4 billion) in repurchase funds and China’s central bank issuance of re-lending at 60% of the loan principal would only cover bank loans up to 500 billion RMB (US$69.0 billion). Local governments, the hardest hit in this real estate downturn, are already financially strained. Even if interest rates fall as low as 1.75%, the low rates of return on affordable housing make it difficult to support larger-scale financing.
On the demand side, the overall economic environment, the high household debt ratio, and consumers’ propensity to save for education and medical expenses continue to constrain purchasing power. Despite generally falling housing prices, many apartments in first- and second-tier cities still cost millions of RMB, with a stubbornly high housing price-to-income ratio.
To address the real estate sector’s oversupply problem, some suggest a less constrained market correction with minimal government intervention. This approach may enhance market efficiency and achieve true price discovery. But it poses significant risks, including heightened market volatility and potential large-scale social unrest.
In the short term, China’s central government must further intervene to support the real estate market and stabilize house prices, ensuring no economic systemic risks.
This calls for greater support from the central government coffers, such as through issuing additional trillions of RMB in special bonds to purchase existing housing. Data shows that the bid multiple for the 24 Special Treasury Bond 01 on 17 May 2024 was 3.9 with a marginal multiple as high as 382.6. This reflects strong investor demand and indicates that there is still substantial room for bond issuance. The central government needs to seize the opportunity to build affordable housing in a deflationary environment with low interest rates. But bond issuance, generally speaking, must be premised on continued moderate economic growth.
Simultaneously, deeper and faster state intervention via institutional reforms is needed. Central and local governments have to sort out their responsibilities and expenditure roles in this.
Local governments should adapt to local conditions, accelerating the development of distinctive industries and innovative economies based on local resource endowments and market demand. Introducing and expanding local taxes — such as a high-end property tax, resource tax, and carbon tax — can provide stable revenue sources and reduce reliance on land transfer income. Not only will these taxes increase local fiscal revenue, but they will also guide local economies toward technological innovation and low-carbon transformation.
China must also accelerate reforms of social security and income distribution, helping to support a lift to household consumption. Effective implementation will require coordination between the central and local governments and active participation by the whole of society, particularly business owners and the wealthy.
In addition, household registration system reforms are needed to eliminate socioeconomic constraints on migrant workers. This might help increase household consumption and residential occupancy in currently empty housing blocks in the medium and long term, but could also lead to some short-term economic pain.
China’s real estate industry faces a bumpy road. Only bold and well-coordinated actions will allow it to navigate the current turbulence. But the key lies not just in immediate relief, but in accelerated institutional reform that will ensure stability and sustainable growth.
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