The Chinese housing market went into crisis in 2020 following the government’s introduction of a strict debt policy. The sudden decision to stop the flow of “easy credit” that had fueled the thriving housing market triggered a wave of developer bankruptcies and shook the confidence of home buyers.
On top of that, huge sums are still owed to associated builders, decorators, real estate agents and banks.
The country’s housing problems continue to this day, with the number of unsold apartments now standing at four million homes – that seemingly no one has the confidence to buy. A further ten million apartments or more have been sold but are yet to be finished.
The problem started with a period of over-construction that was fuelled by easily obtained credit. This gave the perception that property was a “surefire” investment and developers went overboard building huge numbers of apartments, many in smaller cities. This over-supply, not surprisingly, dampened the demand for new homes.
During this period, property developers in China took on huge amounts of debt – until the “Three Red Lines” policy was introduced in 2020. It was hoped that limiting debt based on assets and equity, while ensuring developers had sufficient cash, would curb over-construction and bring better security to the housing market. However, the developers’ liquidity issues, declining property prices and stalled projects have further discouraged home buyers, further fuelled by a general economic slowdown and job insecurity.
In addition to the impact on China’s own housing market, global prices on materials such as steel and cement are likely to be affected. There are also concerns over the potential withdrawal of Chinese investment from overseas markets which will affect other countries.
The Chinese government’s answer to these problems was announced this month. The People’s Bank of China is to provide $42 billion of funding to purchase unsold houses from developers to be used as affordable housing. A pilot programme has been operating in eight cities over the last year, although they have not been particularly effective in local stablising property markets.
In addition, the required amount of mortgage deposit will be reduced and the limits on interest rates for the purchase of first and second homes will be removed. Banks will now effectively be able to set their own mortgage rates and reduce the minimum down-payment ratio to 15% for first-time buyers and 25% for second-home buyers.