The IMF put forward three suggestions for China's real estate: guaranteed delivery, residential loans, and housing prices
According to the IMF, the real estate sector is vital to China's economy, accounting for up to 20% of the economy
"Caijing" reporter Kang Kai
Editor|Zhang Wei and Yuan Man
"Real estate will play a smaller but more sustainable role in the [Chinese] economy. Sonali Jain-Chandra, head of the Chinese delegation to the International Monetary Fund's (IMF) Asia-Pacific Department, said.
On February 2, Beijing time, the IMF held a press conference on the Article IV consultation report. The IMF has three recommendations for China's real estate: first, on the supply side, it should speed up the liquidation of troubled developers, and introduce other policies to provide financing for unfinished housing to ensure that developers have the ability to deliver the houses, that is, "guaranteed delivery"; second, on the demand side, mortgage restrictions should be relaxed, that is, "loosen loans"; and third, it is necessary to increase the adjustment of housing prices, that is, "reduce housing price restrictions".
The IMF estimates that China's housing starts are now down more than 60% compared to pre-pandemic levels. As of now, real estate investment is likely to be down 30%-60% from 2022 levels.
According to the IMF, the real estate sector is vital to China's economy, accounting for up to 20% of the economy. For residents, housing prices rose sharply relative to household income in the decade before the pandemic, and consumers were more willing to invest large amounts of their savings in real estate. For banks and local governments, the expectation of continued increases in housing and land prices has allowed property developers to borrow quickly, while land sales have provided important revenue for local governments.
In the IMF's view, if the real estate sector adjusts deeply and slowly, it may increase the risk of local government debt and form a certain negative feedback effect at the macro level.
China's real estate sector sales, starts and new home price index in 70 cities Image source: IMF
Support the financing of guaranteed delivery of buildings
The IMF believes that on the supply side, it is necessary to speed up the liquidation of troubled developers, and introduce other policies to provide financing for unfinished housing to ensure that developers have the ability to deliver the housing, that is, "guaranteed delivery". Behind this is to provide "insurance" for home buyers to protect them from the risk of developers failing to complete their purchases, helping developers restore confidence and ease sales pressure.
According to Lu Ting, chief economist of Nomura China, in recent years, only a little more than 50% of the off-plan properties sold in China have been completed, which has affected residents' demand for housing. "At present, China's off-the-plan market is similar to the futures market, and the discipline of the futures market must be enforced, that is, delivery must be guaranteed. Guaranteed delivery is the key to clearing the real estate market in 2024. He said.
According to media estimates, as of June 2023, the total contractual liabilities of China's five largest real estate developers who are unable to repay their overseas debts are about US$266 billion, which can roughly represent the total value of the houses they have sold but have not yet delivered.
Poor delivery of new homes has been undermined by consumer confidence and new home sales. According to the latest data from market research institute CRIC, new home sales of China's top 100 real estate companies fell sharply in January. The total sales of these developers were about $32.83 billion, down 34% year-on-year and a new low in July 2020.
The IMF believes that it is necessary to appropriately promote the "guaranteed delivery of buildings" through the "fiscal + monetary" approach. In addition, a comprehensive central government-led strategy should be adopted to reduce the stock of local government debt by restructuring unsustainable local government financing vehicles through bankruptcy mechanisms such as debt write-downs and public asset sales.
On January 12, the housing and finance regulator ordered the creation of a white list of real estate projects eligible for bank loans. The regulators asked local governments and commercial banks to work together to develop the list.
Previously, China's central government, through policy banks and local governments, had allocated special funds to help cash-strapped developers complete the construction of pre-sale projects. In addition, the People's Bank of China also said that it would provide up to $27 billion in interest-free loans to large commercial banks if they provided loans to developers for the same purpose.
Investment in China's real estate sector Credit: IMF
Relaxation of restrictions on loans to residents
The IMF believes that on the demand side, the restrictions on residential housing loans should be relaxed, which is expected to release the demand of the real estate market.
In 2023, the Chinese government eased some restrictions on home purchases in small and medium-sized cities and lowered mortgage interest rates. Not only that, but towards the end of the year, Beijing and Shanghai, the cities with the largest Chinese population, also reduced the proportion of down payments for home buyers.
According to the estimation of commercial banks, affected by the above-mentioned policies, the first home loan in Beijing, the loan amount of 1 million yuan, the term of 20 years, and the use of equal principal and interest repayment method of personal housing loans as an example. On January 1, 2024, the loan interest rate dropped from 4.3% to 4.2%, and the monthly payment dropped from 6,219 yuan to 6,166 yuan, a decrease of 53 yuan. If the loan term is calculated for 20 years, the total interest expense will be reduced by 12,801 yuan.
In addition, according to the calculation of Shenwan Hongyuan, a brokerage firm, taking the purchase of a second house with a total price of 10 million yuan and an area of less than 144 square meters in the main urban area of Shanghai as an example, on the one hand, the down payment ratio is reduced from 70% to 50%; on the other hand, if the owner's purchase price is 10 million yuan, the corresponding VAT is underpaid by 450,000 yuan, accounting for 4.5% of the total house price; the mortgage interest rate is reduced from 5.25% to 4.5%, and the down payment ratio is 50% Unchanged, assuming a loan for 30 years, the corresponding monthly payment will be reduced from 27,610 yuan to 25,334 yuan, and the reduced monthly payment accounts for 8% of the original monthly payment.
Chen Wenjing, director of market research at the China Index Research Institute, believes that in December 2023, the real estate policies in Beijing and Shanghai will be optimized more and involve a wide range of areas, and they will make full efforts to reduce the cost of buying houses and the threshold for buying houses.
Residential real estate investment as a share of GDP Image source: IMF
Reduced room rate restrictions
The IMF believes that increasing the adjustment of housing prices is also a means to boost real estate. After the price correction is sufficient, the market is expected to clear out, and trading volume is released. "Some cities saw only a modest drop in house prices, in part because they tried to limit the price drop by adjusting the rules and guidance for listing prices. The agency said.
The IMF expects basic demand for new housing to fall by nearly 50% over the next decade.
This coincides with some of the recent market sentiments. Gao Shanwen, an academic member of the China Finance 40 Forum (CF40) and chief economist of SDIC Securities, believes that price restrictions are the main reason for the differentiation of transaction volume in China's primary and second-hand housing markets.
"The local government has limited the price of the first-hand housing market, the price cannot be fully corrected, and the market is difficult to clear, resulting in the transaction volume cannot be released, the market cannot play its normal function, and the adjustment process cannot be completed smoothly and thoroughly. The price of second-hand housing can fall more freely, and once adjusted to a reasonable range, rigid demand can be released. He said.
According to Gao Shanwen's estimate, according to the data disclosed by the governments of 13 cities that are easy to collect on the basis of transfers, since 2021, the number of first-hand housing transactions has continued to shrink, and by 2023, it will shrink to a level of about 7% off.
In contrast, the second-hand housing market, which has fewer price restrictions, has increased significantly. Judging from the data of CRIC 30 cities with a larger caliber, the transaction volume of second-hand housing in China's second-tier cities will hit a record high in 2023. Compared with the first-hand house falling from the top to a 7% discount, the transaction volume of the second-hand house will only drop to an 8% discount in 2022, and it will increase significantly in 2023, hitting a record high.
The IMF also believes that the first-hand housing market is still facing structural problems. As the population ages and urbanization slows, there will be less demand for additional new housing in the future. Not only that, because land revenue is an important part of local government revenue. If the real estate sector adjusts more deeply and takes longer, local governments will face further fiscal pressure, resulting in adverse macro-financial negative feedback effects.
Editor-in-charge | To be sure