China’s real estate rescue plan: will it work?

10 June 2024 - 15:00

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China has presented a fund worth over 40 billion dollars in an attempt to solve the real estate crisis gripping the country. This measure may not be enough.

China's real estate rescue plan: will it work?

Will it be enough to save the real estate sector once and for all? This is the question that analysts asked themselves as soon as China presented a 300 billion renminbi (41 billion USD) fund, specifically designed to support government purchases of unsold homes.

The new measures could, in fact, shake up a three-year crisis that has weighed on the country’s economy. However, there are those who think that the sum put on the table by Beijing may not be anywhere near enough to resolve the dossier. Goldman Sachs, for example, estimated that, on a cost basis, China would have 30 trillion renminbi of unsold real estate inventory, including completed land and apartments, or 10 times the amount sold last year.

The estimates of this unsold real estate are variable but, in any case, dwarf the financing presented by the People’s Bank of China (PBOC). Funds, among other things, which various national banks will lend to help local state-owned enterprises purchase a number of unsold properties, which could then be used as social housing or put back on the market at affordable prices.

Doubts about China’s real estate plan

The new measures also include the abolition of minimum mortgage rates and the reduction of down payments for first home buyers, and effectively reflect the need to revive the market more urgently. That same market has anchored the economic growth and wealth of China’s families for decades.

Analysts at Morgan Stanley, as explained by the Financial Times, believe that the measures mentioned above “strike a good balance between providing some cushion and letting the real estate cycle run its course without increasing risks for businesses and local state banks". Be careful though, because the drop in prices has imposed an increasingly pressing financial risk during the three years of slowdown in the real estate sector. New home prices fell at the fastest monthly rate in nine years in April.

In the meantime, Goldman Sachs has estimated that, in addition to the unsold real estate assets, in China, there are 90-100 million units of "shadow supply", i.e. purchased as investment properties but not inhabited. “China’s financial system is largely bank-driven, and bank loans are largely, in one form or another, secured by real estate,” Goldman Sachs further noted.

The other side of the coin

Reuters wrote that new home construction in China fell 63% to 634 million square meters in the 12 months through April. Taking into account demographics and other factors, the International Monetary Fund estimates that China’s core housing demand will average 950 million square meters over the next 10 years.

If, on the one hand, China has presented measures to ease a burning problem and stimulate new housing purchases, on the other these same measures generated a fair amount of discontent in some segments of the population. The New York Times reported on the situation that homeowners are finding themselves in, many of whom have invested their savings in purchasing more apartments.

These same individuals now worry that the government’s relaxation of restrictions could drive down property prices and compromise their investments. Many citizens hope that the properties they purchase will continue to generate wealth for future generations and that the changes being implemented will not affect their cities.

Original article published on Italy 2024-06-08 07:10:00. Original title: Luci e ombre del piano di salvataggio immobiliare della Cina

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