Authorities imposed rules against ‘malicious’ price cuts but now are rethinking them, with hard-to-predict consequences for the economy
A complex of unfinished apartments earlier this year in Xinzheng, China. PEDRO PARDO/AGENCE FRANCE-PRESSE/GETTY IMAGES
Sept. 27, 2023 12:56 am ET
HONG KONG—China’s gigantic real estate bubble has popped, but despite the market’s prolonged downturn, prices still haven’t fallen much.
In part, that is because of price controls which many Chinese cities imposed on housing over the past two years to keep values stable. Now China is starting to loosen the rules—with unpredictable consequences.
Under the rules, which were applied in dozens of cities, local governments typically blocked developers of new homes from offering discounts of 10% to 15% or more on unsold properties. In some cities, officials put a floor on sale prices for existing homes as well.
In recent weeks, articles appearing in state media have argued that it may be time to ditch the policies and some cities are starting to loosen them. On Tuesday, the southwestern city of Chengdu removed price restrictions for projects on newly sold land in central areas and scrapped government-guidance prices for existing homes.
A broader retreat from price floors could help developers to clear inventories of unsold properties and raise revenues to pay down their sizable debts, setting the stage for a potential recovery.
But it could also expose Chinese homeowners to bigger drops in home prices, hurting consumer confidence when growth is weak—and potentially destabilizing the financial system.
About 96% of urban households in China owned an apartment as of 2019, according to the country’s central bank. And for many, their home is their largest financial asset.
“The logical thing to do is to allow further decline in prices and let the market reach a new equilibrium,” said Yao Wei, chief China economist at Société Générale. “But that’s a risky choice, and there is a great degree of uncertainty as to how things will play out.”
Average new home prices in 100 major Chinese cities in August dipped 0.2% from a year earlier and barely moved compared with the comparable period two years ago, while existing home prices fell 2.4% over the past year, according to data from China Index Academy, a real estate consulting firm.
By comparison, U.S. home prices tumbled nearly 20% between 2006 and 2008. Markets including Phoenix, Las Vegas and San Francisco saw drops in excess of 30% at one point during the financial crisis.
Economists say China’s price floor mechanisms are helping to prevent steeper falls because many buyers and sellers don’t want to do deals when they can’t price properties at their true market value. That has left many properties sitting on the shelf.
Private data shows home sales among China’s 100 largest developers plunged by 34% in August from a year earlier, extending a decline since April. Pain from the slowdown has rippled through the economy, depressing consumer spending and construction activity.
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Momentum for a Change
The price-floor rules are a legacy of Xi Jinping’s efforts to control a housing market that ballooned into a massive bubble in the years leading up to the Covid-19 pandemic. Initially, the government required developers to seek approval on listing prices before they could sell new units—a measure meant to keep them from pushing prices too high.
When Chinese real estate entered a major downturn in late 2021, Beijing ordered cities to make sure the property market continued to develop at a “stable and healthy pace.” Local authorities in many cities—mainly smaller ones—responded in part by barring developers from lowering prices too far below the original ones that they registered with the government.
While some cities set the floors at 10% to 15% below the original prices, others left the details vague, banning developers from “malicious price-cutting” without specifying what that meant.
Recently, Beijing has sent signals indicating it is okay with cities easing or abandoning the price floors, in tandem with other steps the central government has taken to support the market, such as lowering interest rates.
China Real Estate Business Weekly, the flagship newspaper of China’s Housing and Urban-Rural Development Ministry, published an editorial on Aug. 20 urging local policy makers to eliminate price floors.
“Developers should be allowed to carry out self-rescue through price reduction promotions in order to raise funds as soon as possible,” the article said. Other articles in state media have made similar cases.
Some industry analysts have pushed back, arguing in other media that it is too dangerous to remove the floors.
Guangzhou, a manufacturing hub in southern China with a population of 15 million, this month allowed developers to start selling apartments freely without seeking approval on sale prices, according to Chinese media reports. It also lowered the city’s price floor late last year.
Residential buildings in Guangzhou, China, in April. PHOTO: LUDOVIC MARIN/AGENCE FRANCE-PRESSE/GETTY IMAGES
Efforts to reach Guangzhou city officials were unsuccessful.
At least a dozen other cities have recently loosened price restrictions, under certain circumstances.
In Ya’an, a city with 1.4 million people in the western province of Sichuan, the local government in August said developers that are able to sell homes in bulk won’t be subject to a 15% discount limit. Housing authorities in the eastern city of Huangshan also scrapped price controls for developers that sell at least 10 units at a time.
Developers are eager for the price floors to drop. They face hundreds of billions of dollars worth of debt coming due this year—and they need revenue.
Chinese developers had more than 313 million square meters of unsold residential development as of August, up 20% from a year earlier, according to official data. That is around 3.5 million homes, based on the average home size of around 90 square meters.
Risks to the System
Economists say it is hard to know how much prices would drop if price floors were removed more widely, since China hasn’t been through such a serious real-estate downturn before. But any declines would carry risks.
“The worst case is that people continue to sit on the fence because they expect prices to go even lower,” said Jens Presthus, an associate director at Global Counsel, a consulting firm. “This tends to be a self-reinforcing trend.”
Economists generally have been sanguine about property-related risks to China’s financial system, in part because home buyers tend to make large down payments. That gives them extra cushion if home prices fall, unlike the U.S., which saw a wave of mortgage defaults during the financial crisis that weakened the banking sector.
The picture could change in China if prices fall a lot more, triggering fire sales and sending the market into a downward spiral, ANZ noted in a report published in September.
If property values drop 30% in China—as much as they fell in Tokyo and Hong Kong during past downturns, ANZ said—about 12% of the country’s $5.3 trillion mortgage book, or around $640 billion in mortgages, would have negative equity, meaning the properties would be worth less than their mortgages.
If prices drop by half, about 51% of mortgages would be underwater.
In the U.S., nearly a third of all homeowners with a mortgage had negative equity in the aftermath of the financial crisis, according to Zillow.
Residential buildings in Guangzhou, China, in April. PHOTO: LUDOVIC MARIN/AGENCE FRANCE-PRESSE/GETTY IMAGES
“Negative equity could catch households and policy makers off guard” in China, ANZ warned. “Any snowball effect from this could be a black swan.”
It is also unclear whether bigger price drops would motivate many more people to buy homes.
Meng Meng, a 32-year old worker at a Guangzhou factory making bags and suitcases, is eager to own his own apartment after living in the city for more than a decade.
But home values will have to decline a lot before he can afford to buy, Meng said. He now makes 20% less than he did in 2019, before the pandemic. The bag factory has downsized to a few dozen workers from around 100 a year earlier.
“Who would have a lot of cash on hand after surviving the pandemic?” he asked.