China pledges $42 billion in a slew of measures to support the struggling property sector

BEIJING — Chinese authorities on Friday pledged new support for state-owned enterprises to enable them to buy unsold apartments, in an effort that could help developers get more funding to finish construction on pre-sold properties.

These and other measures announced Friday marked Beijing’s latest efforts to address issues in the massive real estate sector.

“I think it is encouraging that the policy is taking a turn of direction trying to support the housing market,” said Zhu Ning, a professor of finance at Tsinghua University and author of the book “China’s Guaranteed Bubble.”

People’s Bank of China Deputy Governor Tao Ling told reporters at a briefing Friday the central bank would provide 300 billion yuan ($42.25 billion) to financial institutions to lend to local state-owned enterprises (SOEs) so they can buy unsold apartments that have already been built.

The central bank expects the support to release 500 billion yuan in financing for such purchases, which the SOEs could turn into affordable housing.

The real estate companies can then use funds earned from those sales to complete construction on other apartments, the central bank said.

As for unfinished, pre-sold properties, the National Financial Regulatory Administration Deputy Director Xiao Yuanqi told reporters that commercial banks have provided 935 billion yuan in loans to finish construction on whitelisted projects since the program was released in January.

“The government’s purchase of housing inventory can inject more liquidity to developers, who could then have more resources for housing delivery,” Larry Hu, chief economist at Macquarie, told CNBC. “Finally the government stepped in as the buyer of the last resort.”

“At this stage, it’s mainly SOEs and local governments to implement the policies, but their resources may be too limited to move the needle at the macro level,” he said. “Later on, we might see more efforts from the central government.”

Earlier on Friday, Vice Premier He Lifeng spoke at a national videoconference meeting on ensuring the completion and delivery of pre-sold homes, according to state media.

Officials speaking to reporters Friday said that housing projects that could not meet the requirements to be on the whitelist needed to address their issues on their own.

Developers “that must go bankrupt should go bankrupt, while those that need to be restructured should be restructured,” Dong Jianguo, deputy head of the ministry of Housing and Urban-Rural Development, told reporters in Mandarin, translated by CNBC. He said homebuyers’ interests and rights should be prioritized, and those that violate the law should be punished.

Resolving China’s real estate problems will take time.

Among the challenges the recent measures face, Zhu pointed out that local governments still have limited fiscal resources, which constrains the amount they can buy.

“There can be quite some rent seeking and moral hazard in determining what to buy and what to pass,” he added. Rent seeking refers to when someone seeks to make more money without creating more value.

“Unless potential home buyers sense some serious change of housing prices going up, the current housing price is still too expense for household income or rent yield,” he said. “However, I am not sure whether the government is willing to go as far as to engineer another big run-up in housing prices.”

The People’s Bank of China on Friday removed a floor on mortgage interest rates, and lowered the minimum down payment ratio for first- and second-time home buyers.

For years, many apartments in China tended to be sold before construction was finished. However, delays in deliveries of completed apartments have increased in recent years as developers have run into financing difficulties.

Nomura estimated last year there were around 20 million such pre-sold, unfinished apartments in China.

At the current sales pace, it will take more than two years to clear the existing stock of new homes, according to a Caixin report citing a local research firm as of March. That’s nearly twice as long as the historical pace of 12 to 14 months, the report said.

The official 70-city house price index released Friday fell more quickly in April than in March, according to Goldman Sachs analysis that looks at a seasonally adjusted, annualized weighted average.

The figures indicated an 8.5% month-over-month decline in April, steeper than 5.6% in March, Goldman said.

“Despite more local housing easing measures in recent months, we believe the property markets in lower-tier cities still face strong headwinds from weaker growth fundamentals than top-tier cities, including the more severe oversupply problems,” the report said.