Here’s Why China’s Strategy to Address Its Housing Crisis is Insufficient.

China is wrestling with a significant housing issue, marked by about four million vacant apartments equal to the geographic area of Philadelphia that no one appears interested in purchasing.

Xi Jinping’s Turnaround Strategy

In an effort to address this challenge, the country’s leader, Xi Jinping, and his team have beckoned the government to buy these housing units. Announced recently, this audacious plan – Beijing’s most assertive move so far – is an attempt to put brakes on the accelerating housing crisis threatening the country’s massive economy. However, the steps taken don’t cut the mustard.

The Real Estate Dilemma: A Deeper Look

Peering beneath the legion of empty apartments, China is plagued by an even more significant crisis: droves of flats sold by developers yet incomplete. Conservative estimates put this number around ten million apartments. China’s real estate bubble expanded to an extraordinary extent, and the aftermath of its bust, almost four years old, continues to baffle everyone.

China’s leadership, already grappling with a slowdown after tripling the growth rate for decades, faces a daunting housing crisis spiraling beyond their control. The precarious situation of vacant apartments and overzealous developers that led to their construction could ram the country’s sustainable growth transition. China’s construction bills accumulate into trillions, affecting builders, real estate agents, banks, and small businesses throughout the nation.

The world witnessed the most significant real estate boom in China, triggered by Beijing and accounting for almost one-third of the country’s economic growth. Suddenly in 2020, Beijing severed the funding roots that boosted growth, leading to a series of bankruptcies that sent shockwaves through homebuyers across the nation.

Test of Beijing’s Strength and Resoluteness

This marked Beijing’s first stringent test in steering China’s economy away from its enduring dependence on building and construction. Now, the government faces yet another trial. In an attempt to curb past excesses, they signaled that no real estate company was too large to collapse. Still, the fall of dozens of major developers has extinguished any remaining confidence in the real estate market.

With potential buyers maintaining a safe distance, the remaining developers stand on a financial cliff’s edge. They are inseparably tied to local banking systems and government financial structures in every city, town, and village. According to estimations by research firm Rhodium Group, the total domestic borrowings by the real estate sector amass to over $10 trillion, including loans and bonds. However, only a minuscule section of it is recognized.

The Impact of Developer Bankruptcies

Following the bankruptcy of significant developers, such as China Evergrande, the housing market’s confidence tanked. Evergrande’s initial default during December 2021 sparked fears reminiscent of the Lehman Brothers’ 2008 downfall, leading to a global financial crisis. However, careful policy support allowed Evergrande to complete apartment constructions, and by the time liquidation orders were served, Evergrande was no longer an operational entity.

Bailing Out Developers in Crisis-Stricken Areas

To halt the tumbling market, Dan Wang, Chief Economist at Hang Seng Bank, suggests the government should bail out medium-sized developers in the most affected cities. Still, top Chinese leaders instead primarily focus on millions of unsold apartments, converting them into lower-rent social housing. A fund of approximately $41.5 billion has been assigned to facilitate loans for state-owned corporates to acquire unwanted property equivalent to eight billion square feet. Out of this, just over half remains as unsold apartments, according to the National Bureau of Statistics.

Support Measures Fail to Halt the Housing Crash

Despite initial positive reactions from developer shares, critics argue that Beijing’s response was too late and will require exponentially larger sums to address the problem adequately. Estimates indicate that it would take somewhere between $280 billion and $560 billion.

Moreover, the drastic cut to mortgage rates, schemes encouraging residents to trade old apartments for new ones, and offering cheap loans to certain cities to buy unsold flats have failed to stabilize the crashing housing market. Local authorities had introduced over 300 measures aimed at boosting sales and supporting real estate companies; however, unsold houses continued to pile up and new home prices kept falling. As a result, Xi Jinping and his team of policymakers consider a program akin to the U.S.’s Troubled Asset Relief Program to withdraw unwanted apartments from the market following the American housing market crash.

The Path Ahead for China’s Economy

With the government now gravely concerned about the dysfunctional housing market, critics question whether local governments should buy all the unsold apartments and what happens if they cannot find buyers. The anticipated price tag for such a program is believed to be in the hundreds of billions of dollars, not tens of billions. Regardless, John Lam, UBS’s China property research head, believes the government’s political commitment will pressure officials into action, even at a loss.

In locations where population shrinkage is felt more acutely – the same that experienced aggressive development – the need for social housing projects will be minimal. Although the road ahead is daunting, it appears that Beijing may have more solutions up its sleeve. Ting Lu, Chief China Economist at the Japanese bank Nomura, suggests that patience will be needed as Beijing takes more stringent measures to tackle the monumental housing crisis.