Fixing China’s property sector will take social housing, not a new market boom

A new round of troubles of high-profile developers has added to the urgency policymakers feel to stabilise China’s ailing property market
While the near-term priority is to stop the bleeding, longer-term reforms such as increasing social housing are needed to put the market on sustainable footing

Aidan Yao

Published: 6:15am, 18 Aug 2023

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China’s real estate market has been undergoing its longest and deepest adjustment since the 1998 reform that gave birth to the commodity housing market. As a pillar industry with extensive reach, the property market woes of the past two years have greatly affected the economy, depressed asset markets and weighed on confidence. Many foreign investors consider it the biggest macroeconomic risk to Chinese assets.

However, as this painful adjustment reaches its second anniversary, there is the lingering question of how and when can China resolve its real estate predicament and bring the sector back from the brink. The urgency to find an answer has become more pronounced lately as the financial troubles of high-profile real estate developers such as Country Garden have started to rattle markets again.

To be sure, this is an issue concerning not just the property market but the entire economy and even systemic financial stability. A three-pronged strategy – ranging from near-term actions to medium and long-term reforms – is needed to tackle this challenge.

The near-term priority has to be to stop the market bleeding. Following the Politburo’s pledge to refine housing policies in line with changing market fundamentals, the People’s Bank of China, the Ministry of Housing and Urban-Rural Development, banks and some local governments have devised more detailed action plans.

These include cutting mortgage interest rates and down payment ratios, redefining first-time homebuyers, and supporting second home purchases and upgrade needs. The Politburo has also called for expediting the completion of unfinished projects and increasing social housing provision and shantytown renovation in large cities.

The policy list is long and comprehensive, but its success will depend on execution. These actions are aimed at stabilising housing activity rather than engineering another nationwide market boom, which is neither desirable nor feasible.

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Kicking the can down the road again could render the pain already endured futile, making the eventual adjustment even worse. Even if the authorities want to backtrack from “housing is for living, not speculation”, I am sceptical that investors will respond by returning to the market en masse. With their expectations of house prices already changed by structural shifts in the market, few would invest in an asset class with modest, or even negative, expected returns.

The bottom line is that Beijing does not want to, and cannot, reignite another major housing market boom. Instead, the goal is to stabilise the market and smooth its adjustment to allow for a gradual unwinding of the imbalances.

This will pave the way for the medium-term task to wean the economy off its reliance on property-driven growth. It will require China to find a replacement growth engine. The obvious contender is energy transformation, which has the scale, reach and duration to play the role.

The range of estimates on the investment needed to transform China’s economy and society as the country pursues carbon neutrality is wide, but they are all measured in hundreds of trillions of yuan. Like property, these green investments have a long upstream supply chain that involve mining, metal processing, renewable technology innovation, equipment manufacturing and installation.

Their impacts downstream could be even wider than property as all practical users of energy will need to adjust their electrification systems, and thus the effect will be felt in all corners of the society. Finally, much like urbanisation – which helped fuel decades of the country’s property boom – China’s green transformation is not expected to be complete until at least 2060, making it a potentially enduring driver of economic growth.

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Finally, China faces a long-term task of restructuring its vast housing system. Even if it ceases to be a major growth driver, the system will still provide shelter for 1.4 billion people, making it essential infrastructure for the economy and society at large. As such, getting it back on its feet and moving towards sustainable development is imperative.

To revamp the system, I recommend emulating Singapore’s two-tier model, where the top-tier private housing is meant to serve the wealthy while social housing aims to cater to the rest. This will require China to build a multilayer housing system consistent with what was communicated at last year’s central economic work conference. It is also why the Politburo has called on local governments to speed up housing provision.

How social housing could cure what ails China’s property sector and economy

However, to avoid creating more supply in an already oversupplied market, the government should refrain from building more properties outside a handful of mega cities. Instead, it should buy existing vacant stock from developers and convert them into social housing.

This approach will achieve three goals: clear inventory to bring supply and demand of the market to better balance, provide liquidity to developers to pay down debt and reduce their financial fragility and meet the needs of migrant workers and low-income households to accelerate urbanisation and progress towards “common prosperity”. It has the potential to kill three birds with one stone.

The ongoing real estate adjustment is creating an uphill battle for Beijing’s efforts to stabilise the economy. A timely implementation of policies announced by the Politburo is necessary to halt the market’s decline and buy time for China to nurture new growth engines and revamp the housing system consistent with its new development priorities. Time is of the essence, and the authorities must act fast to stand a chance of succeeding.

Aidan Yao is a macroeconomist with more than 15 years of experience in both public- and private-sector organisations