Local governments inject liquidity into China housing market by encouraging upgrades with limited success. Here’s why

The new scheme will boost liquidity in both the new and existing homes markets, executive at real estate research firm China Index Academy says

Such ‘old-for-new’ practices will only marginally improve new home sales but not fundamentally: Fitch

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The scheme has been gaining traction over the past few months, notably in larger cities such as Nanjing and Wuhan, above. Photo: AFP

Published: 10:00am, 26 Dec 2023

In an effort to boost a stagnant housing market, China’s local governments have been urging residents to sell their old homes in exchange for new ones, but the call has so far yielded lacklustre results with prospective buyers fearing that poor market sentiment will force them to offer hefty discounts on their old homes.

Home prices have been on a downward trajectory since early 2022, with new home prices in major cities recording a 0.38 per cent month-on-month decline in October this year, the most in eight years, according to official data.

To address this problem, municipalities, especially in China’s lower tier cities, have been rolling out support measures to boost new home purchases. Under a new initiative called “old-for-new”, local authorities are helping prospective homebuyers sell their old homes, while offering them partial subsidies to buy new homes, provided that the old homes are sold within a designated period of time, usually no more than 90 days.

Zibo, a small city in eastern Shandong province, was the first to test this method in September. Under the Zibo model, prospective buyers needed to first sign a contract with a brokerage firm to list their old property, and then execute a separate contract with a developer indicating which new property they wished to buy. To lock up the new property, the buyer also needed to pay the developer a deposit, which could be returned if their old home is not sold in time.

“The new scheme will enhance the efficiency with which homeowners exchange and upgrade their homes, thereby boosting liquidity in both the new and existing homes markets,” said Chen Wenjing, director of market research at the China Index Academy, a real estate research firm.

Government subsidies will also ease the cost burden on homebuyers, while creating the certainty of sale for developers, she said, adding that it is possible that more cities across China will implement the measure in the future, especially first and second-tier cities where there is a population influx and greater demand for housing.