Chinese Governments to Start Buying Homes to Hold Off Real Estate Collapse

Share prices in China’s tottering real estate market perked up on Thursday after news that various levels of the Communist government will begin buying up excess houses, a long hoped-for stimulus that could stabilize real estate prices by cleaning up excess inventory.

Some analysts doubted the government could afford to buy enough property to defuse the trillion-dollar debt bomb that threatens China’s economic future.

The South China Morning Post (SCMP) reported on Thursday that the government of Hangzhou, a technology hub city and provincial capital that includes the headquarters of the massive Alibaba Group Holding corporation, announced a plan to buy unoccupied homes in one of its districts and rent them out as affordable housing.

Hangzhou’s program was seen as the first municipal government response to a call from the national Politburo for local governments to “digest existing housing inventory.” Another provincial capital, Chengdu, removed restrictions on home purchases in tandem with Hangzhou and could follow its lead on buying excess home inventory, as well.

On Tuesday, Bloomberg News reported that the central government’s State Council is soliciting feedback from provincial and city governments on a plan to purchase millions of unsold homes across the country.

Such a plan implemented on a nationwide scale would represent China’s biggest move to stabilize the real estate market, and it would come with a staggering price tag. The SCMP noted that China has something like 3.5 billion square feet of unsold residential property, plus at least 20 million unbuilt or delayed houses, which would cost $443 billion to complete.

Hangzhou’s buyout plan is a mere drop in the bucket against such titanic liabilities, but it appeared to have symbolic value, as several real estate companies posted their biggest stock price increases in months on Thursday.

“We view the initiative as encouraging, and think it will partly help with the absorption of excess inventory, particularly in lower-tier cities with subdued home demand,” Morningstar analyst Jeff Zhang said on Thursday.

Zhang and other analysts doubted that the Chinese government at all levels had the resources necessary to buy up enough property to stabilize the real estate market, and, in any event, the great lingering danger was the lack of consumer confidence. Chinese home buyers are severely disillusioned after pouring their life savings into homes and apartments that were never completed. Their confidence cannot be restored by the government snapping up distressed properties and turning them into cheap rental units.

The SCMP saw the regime in Beijing back away from its two-decade-long war against “property speculators,” a ceasefire that might be even more encouraging to the market than the Hangzhou property-buying scheme.

The SCMP wrote:

It is a remarkable U-turn that has caught on in major Chinese cities. While a number of places, including Beijing and Shanghai, still maintain restrictive measures to keep unwanted buyers out of the local housing market, the days are numbered for such measures given the slump in China’s property market. In fact, even in Beijing and Shanghai, small steps of relaxation have already started.

Hangzhou is one of the most recent cities to back away from the war on speculators and remove purchasing restrictions designed to keep home flippers from making big profits when real estate prices were soaring. 

The Economist worried in April that China might be in a race between deregulation bringing its real estate market back to life and state ownership schemes “eating” the market before it can climb out of its coffin. According to some projections, state-owned “social” properties will become the dominant form of housing in China by the end of the decade.

Chinese policymakers amuse themselves with visions of dour Communist bureaucrats providing a more stable housing market, with controlled rents and fewer wild price fluctuations, but the Economist pointed out that authoritarian governments make for lousy realtors and terrible landlords:

China’s private homebuilders are masters of supply chains. Their ability to organize labor for construction is unparalleled. The state, in contrast, is a lousy builder. As state firms take on a bigger and bigger role, the quality of new homes is likely to fall.

The intervention will also shake the foundations of the market. Homebuyers will probably become reluctant to buy a home at commercial rates when the same unit may later be available at subsidized ones. Market-watchers suspect officials want to conserve funds to buy up homes on the cheap, taking advantage of the struggles of private firms. As a consequence, the rapid growth of social housing will probably cause an even deeper crisis among private companies

For the moment, private Chinese companies looking to unburden themselves of real-estate liabilities might be happy to hear the State is going on a home-buying spree, but their happiness may be short-lived — especially if the State runs out of money long before it can “fix” China’s real estate crisis.