The housing market can be saved

There is no serious oversupply of real estate in China. The rise and fall of the housing market is related to the interests of thousands of households, and the downturn in the housing market is a medium obstacle to the return to normal economic growth. Policies need to be further loosened to unleash latent demand. A reasonable debt restructuring requires the majority shareholder to take out equity and other property to compensate creditors

Text: Shan Weijian

Editor|Li Gaochao

In September 2023, a number of media published an article entitled "1.4 billion people can't live in existing housing!", which was reprinted by many media around the world for the first time.

However, there are statistics on the annual floor area of commercial housing in China. According to the National Bureau of Statistics, the total floor area of commercial housing (excluding self-built houses) in the past 30 years was 14.4 billion square meters, and the average living area of Chinese reached 41.76 square meters in 2020, which means that the total area of commercial housing buildings in the past 30 years is only enough for 345 million people to live. At current per capita standards, 58.5 billion square meters are needed to accommodate 1.4 billion people. In other words, at an average rate of construction over the past 30 years, it would take more than 120 years to build.

Is it necessary to be more serious? The reason is that this will have a substantial impact on the real estate market, and indeed on the overall economy, and even on the perception of the Chinese economy by global investors.

Is there a serious oversupply in China's housing market?

Economist Gao Shanwen pointed out in a research report published at the beginning of the year: "There is no oversupply in the real estate market. He had two grounds. First, the surplus is characterized by a serious contraction in second-hand housing transactions, which will take five or six years to return to normal from beginning to end, as is the case in countries such as the United States and Japan. China's second-hand housing market has seen significant growth in transaction volume in 2023. According to data from the Shell Research Institute, last year, the area and value of second-hand housing transactions nationwide increased by 44% and 30% year-on-year respectively, which is not unrelenting. Second, the share of real estate development investment in the economy reached about 12% in 2013, then fell sharply, from 6.6% last year, to 5.5% this year, below the normal level of around 6.5%-7%. As a result, he argues, "there is a serious overshoot in real estate investment." There is no oversupply in the real estate market, but it has undergone a serious correction that has a significant overshoot. ”

Is the housing market out of trouble? Not yet. There are two manifestations.

First, in 2023, the total sales area and value of first-hand and second-hand houses will increase by 6.3% and 5.8% year-on-year, respectively, but in strong contrast with the large increase in the second-hand market, the area and value of new homes sold last year will decrease by 8.2% and 6.0% year-on-year, respectively. The main reason for this is that the "fall limit order" (although it has begun to be loosened in some places) has caused the price of new homes to be higher than the market value, resulting in a price but no market, and new houses cannot be sold. Second-hand houses are traded at market prices, so there is a price and a market.

Second, developers are still generally mired. Residential development investment fell 9.3% last year. The number of bankruptcies of real estate enterprises soared from 123 in 2022 to 590 in 2023. Last year, real estate companies accounted for more than 70% of the defaulted domestic bonds, of which 96% were privately owned.

As a pillar industry, real estate has historically made an important contribution to economic growth, but the proportion of its contribution has basically shown a decreasing trend after peaking in 2009, hovering between minus 1% and plus 2% between 2014 and 2021. This is a good thing, because it shows that the economy is not too dependent on real estate. However, the contribution of real estate to GDP (gross domestic product) growth plummeted to minus 4% in 2022 and recovered to minus 1.3% in 2023, remaining a moderate obstacle to the return to normal growth (see Figure 1).

The impact of real estate on the economy is not limited to this, but also transmitted to personal consumption through housing prices. In 2015, the contribution of real estate to GDP growth was minus 1%, which is not as good as last year, but people did not feel it, because house prices were still rising at that time. The two years are different, with the second-hand home price index falling by 9% from its peak in 2021 to the end of last year, shrinking household wealth and thus reducing the willingness to spend. According to the central bank, China's household deposits will grow by 18 trillion yuan in 2022 and 17 trillion yuan in 2023, far outpacing the growth rate of personal income, reflecting the negative wealth effect of real estate – people are afraid or unwilling to spend. The sluggish consumption has made the transformation of the economic growth model from investment-driven to consumption-led more difficult.

The loss of wealth to the people is not only the fall in housing prices, but also the loss of investment in bonds issued by real estate companies. In the case of a large number of bankruptcies and defaults on housing debts, it stands to reason that major shareholders should be the first to bear the losses, and then it is the turn of individuals and banks who hold creditor's rights. However, debt restructuring, i.e., procedures that include extensions, interest reductions, interest-free payments, impairments, etc., often protect the major shareholders who should be liable, but instead cause the bondholders to suffer the most. This is especially true for offshore debt, because there is no cross-border bankruptcy mechanism, and creditors can only admit compensation, but the bond issuer can still survive and its shareholders' holdings remain unchanged. This is very unreasonable. According to Chinese and foreign laws and regulations, in the event of bankruptcy or debt default, the creditor should have the first priority over the remaining assets. In debt restructuring, the first person to bear the loss should be the major shareholder, not the creditor. Therefore, the most reasonable debt restructuring plan should include the majority shareholder compensating creditors with equity or other assets in exchange for the approval of creditors.

The potential demand for real estate is huge

Since last year, the central and local governments have introduced a number of policies and measures to save the housing market, which have produced a certain effect, but they are still not enough, and the main contradiction of insufficient demand has not been fundamentally solved. This is because many of the policies in place still limit and suppress demand.

When the real estate market is overheated, the purpose of the purchase restriction is to cool down, and when the market is too cold, the purchase restriction policy that still exists is equivalent to making matters worse. Although there have been varying degrees of relaxation in various places, it is time to completely cancel them. Taking Hong Kong, China as an example, in order to cool down the housing market a few years ago, the Hong Kong government came up with a set of "spicy tricks", that is, adding various additional stamp duty on transactions. Last year, the property market in Hong Kong, China, fell into a downturn and was extremely unsold. At the end of February this year, the Hong Kong government announced the "withdrawal of spicy", that is, the cancellation of all "spicy tricks", and achieved immediate results: the transaction volume rebounded strongly, sweeping away the haze of the real estate market.

In fact, the potential demand for real estate in China is huge. Chinese have always regarded property as the preferred asset class for wealth accumulation, so property accounts for 59% of household wealth. In fact, real estate is the largest asset class in the world. In the United States, the total value of the housing market is greater than that of the stock market, but property accounts for only about 25% of household wealth. Chinese people have a soft spot for real estate, and according to central bank statistics, the housing ownership rate of urban residents exceeds 90%, probably more than any other country in the world (66% in the United States and 62% in Japan). The strong purchasing power of Chinese has benefited the real estate market in the world's metropolises in the past two years, and in cities such as Tokyo, London, New York, and Los Angeles, Chinese are the largest buyers of foreign property. However, Chinese people cannot buy houses anywhere in their own country, and as a result, fertilizer water flows into the fields of outsiders. In China's vast market, why can't people who can afford to buy houses own properties in various places? Abolishing the restrictions on buying houses in other places will not only increase demand, but also help people move and reduce the pressure on employment.

A distinction should be made between long-term ownership and short-term "speculation". This is not difficult, there are different short-term sales regulations in different places. In fact, it is more effective to use additional taxes to raise the cost of short-term transactions, so that speculation outweighs the losses.

The "fall limit" on the price of new homes is also an obstacle to the stability of the housing market. The decline in housing prices certainly causes psychological pressure on the surrounding homeowners, and also has a negative wealth effect. However, artificially making the selling price higher than the market value, resulting in a price without a market, is like covering your ears and stealing a bell, which does not play a practical role, and prolongs the pain. Better a finger off than always aching. Only by canceling the fall restriction order, reducing prices and promotions, and accelerating the removal of inventory can the housing market be reversed as soon as possible and the hope of steady appreciation can be restarted.

All in all, there is no serious oversupply in China's housing market, but it has not yet turned around, as demand and prices are still under policy constraints, blocking the market's mechanism to establish a new equilibrium. When the housing market is overheated, macro-control is necessary to prevent problems before they occur. Now that the purpose of the policy has been achieved, what needs to be guarded against is overkill, and it is too much. For now, consideration should be given to an immediate and comprehensive easing of restrictions and a return to the market's self-regulating function to avoid a prolonged weak recovery due to excessive corrections on both the supply and demand sides. In this way, the market can be quickly stabilized, the role of this pillar industry can be restored, and the public can regain confidence in the value of real estate and the willingness to spend, thereby driving economic growth.

(The author is Executive Chairman of PAG)

Editor-in-charge | Zhang Yufei