The central bank and first-tier cities are working together to see good news for China's property market

In September, the Chinese government launched its largest stimulus policy in recent years, causing the stock market to surge dramatically for two consecutive weeks, creating a historic moment. At the same time, real estate stimulus policies were also rolled out, with favorable policies being introduced overnight in various regions. These included adjusting interest rates for existing mortgages, lowering the minimum down payment ratio for second homes, extending the period for certain financial policies, and optimizing refinancing for affordable housing. So, what can we expect from the Chinese property market during the Golden Week in October? How can long-standing issues in the property market, such as housing oversupply, be addressed?

China's Consecutive Stimulus Policies: Can the Stock Market Rebound Reverse the Economic Downturn?

On September 24, Pan Gongsheng, governor of the People’s Bank of China, introduced a comprehensive monetary policy targeting three objectives: stabilizing growth, housing prices, and the stock market. The most significant element was the mortgage policy. Pan announced that commercial banks would soon be guided to reduce interest rates for existing mortgages to the level of newly issued mortgages, with an average reduction of about 0.5 percentage points. Additionally, the minimum down payment for second homes would be lowered from 25% to 15%, the same as for first homes.

Within a few hours, China’s stock market shook off the gloom of the past two years, experiencing a substantial two-week surge.

Meanwhile, real estate stimulus policies continued to emerge. On September 29, the Ministry of Housing and Urban-Rural Development held a meeting supporting first-tier cities in utilizing their autonomy to regulate the real estate market. Shanghai, Guangzhou, and Shenzhen followed suit, lowering mortgage interest rates and down payments to record lows nationwide.

China's property market, like the stock market, has been in a slump for the past two years. Under the policy of "housing is for living, not for speculation," sales halved in 2022, reaching a bottom. On May 17 this year, the Chinese government introduced three major measures: significantly reducing the down payment ratio, lowering the interest rate for housing provident fund loans, and removing restrictions on commercial loan interest rates. The government also set up a 300 billion yuan refinancing fund for affordable housing, to be used for government acquisitions of existing properties for affordable housing.

At the time, many economists described the measures as "epic" in scale, but the property market did not rebound, continuing to stagnate.

According to the latest "100 Cities Price Index Report" from the China Index Academy, current home sellers are lowering prices to stimulate sales, causing prices of second-hand homes in these cities to continue declining. Sales volumes of second-hand homes have dropped month-on-month but still show year-on-year growth. In the new home market, prices have risen slightly due to the launch of quality improvement projects in some cities, but sales remain weak, with September sales falling in key cities.

The report from the China Index Academy noted that recent central government policies have effectively boosted market confidence. Overall, the Politburo's meeting indicated a commitment to stabilizing the real estate market, sending the strongest signal yet for real estate stabilization. It is expected that various housing policies will accelerate in the fourth quarter. On the demand side, there is still room for optimization of purchase restrictions in cities like Beijing, Shanghai, and Shenzhen. Additionally, local governments may increase home purchase subsidies, lower mortgage rates, reduce down payment ratios for second homes, and lower transaction taxes and fees to ease the financial burden on residents. Based on past experiences, after the intensive rollout of policies, the market is likely to see some recovery.

Real Estate Boom: Shanghai’s “Seven Measures” and Local Governments’ Invitations to Buy Homes

On September 29, a wave of favorable real estate policies was announced. Shanghai, Shenzhen, and Guangzhou collectively lowered the threshold and costs for home purchases, marking an unprecedented period of policy relaxation for the real estate market.

According to Chinese media reports, Shanghai was the first first-tier city to act, introducing seven major favorable policies for the real estate market. Among them, families without local household registration only need to pay social insurance for one year to purchase a home outside the Outer Ring, releasing a large number of home purchase opportunities into the market. The value-added tax exemption period was shortened from five years to two, significantly reducing transaction costs for individuals selling homes.

On the evening of September 30, Beijing introduced eight new housing policies, including lowering the required years of social insurance payment for non-Beijing residents to buy homes. For homes within the Fifth Ring, non-local residents must have paid social insurance or personal income tax for at least three consecutive years before purchasing; for homes outside the Fifth Ring, the requirement is two consecutive years.

Guangzhou went even further, fully lifting all home purchase restrictions for residents, becoming the first first-tier city to do so.

The new policies have created a new bargaining phase for buyers and sellers. Some homeowners raised prices overnight to test the market, while some buyers rushed to negotiate and sign contracts. Many developers are meticulously preparing their marketing strategies for the National Day holiday, and sales teams are already expecting to work overtime.

China's Serious Vacancy Problem

After years of construction booms, China’s real estate market hit a peak in 2021. The government, concerned about a housing bubble, tightened credit for property developers, introducing the “three red lines” policy. However, the issue of overbuilding has become deeply entrenched, leading to a severe oversupply of properties.

According to the Wall Street Journal, because the Chinese government does not provide official statistics on vacant homes, economists estimate the number of empty units using vacancy rates, presale permits, and other data. They estimate that China has tens of millions of vacant homes.

The report states that out of an estimated 90 million vacant homes, 31 million are either partially or fully built but have never been sold. These properties could be demolished, but many are caught up in lawsuits related to bankrupt developers. In many cases, cities and developers hope to complete these projects.

An additional 50 to 60 million homes have been purchased but remain vacant. Due to limited investment options in China, many people choose to invest their extra money in speculative properties, often located in smaller cities with lower housing prices.

A recent survey by Citi Research found that in China’s first- and second-tier cities, about 74% of households own more than one home, and nearly 20% own three or more homes.

These properties may be harder to deal with, as owners still expect them to appreciate in value. Many are in partially occupied buildings, making them difficult to demolish.

Additionally, 20 million sold homes remain unfinished due to developers’ cash flow problems and poor market conditions. While owners still want to receive their homes, developers lack the funds to complete them.

It is likely that with the Chinese government introducing more real estate support measures, some of these vacant properties will be sold and occupied, and housing prices may rise again. Given the vibrant economies of cities like Beijing, Shanghai, and Shenzhen, along with the influx of migrants, these cities are likely to absorb excess housing.

However, the problem is much more challenging in smaller cities, where economic prospects are often weaker and populations are declining. China has nearly 340 cities classified as third-, fourth-, and fifth-tier, with populations ranging from hundreds of thousands to millions. Many of these cities are struggling economically.

Harvard economist Kenneth Rogoff noted that these smaller cities contain more than 60% of China’s housing stock. Despite population declines, many local governments continue encouraging developers to build more homes, as land sales and construction boost economic growth and fill local government coffers.

As China’s economy falters, the urgency of addressing the housing surplus is growing. The May 17 policy stipulated that the central bank would provide 30 billion yuan in low-interest loans to banks for state-owned enterprises to buy vacant homes and convert them into affordable housing.

However, according to the Wall Street Journal, as of the end of June, banks had only used 4% of the available amount. Experts say that even with low-interest loans, companies lack the incentive to convert vacant homes into affordable housing because rental income is too low to make a profit.

While the Chinese government has recently increased support for real estate, economists say more measures are needed to lift the Chinese economy out of its current slump.

As China’s population continues to decline and many cities struggle, there may never be enough people to fill these homes.