Homes and hazards

Back in August 2019 WiC reported predictions from Huang Qifan, a former mayor of Chongqing, that tens of thousands of property firms could be headed for bankruptcy. His forecast followed warnings from officials that “houses are for living in, not for speculation,” rehashing a phrase from Xi Jinping, the Chinese president.

Much of the concern about China’s real estate industry has concentrated around the issue of moral hazard in which homebuyers and developers have chased profits on the belief that it’s a one-way bet on prices. But that assumption has now collapsed, alongside the implosion of the sector’s pre-sales model, which is putting unprecedented pressure on the industry’s finances.

Presumably there’s a silver lining in the situation for a government that wanted to bring the sector into line, you might think.

But the challenge for Beijing’s political leaders is how to underline the message on moral hazard in a way that doesn’t torpedo the prospects for the wider economy, especially for a sector that contributes as much as 30% of the country’s GDP by some calculations.

And also to do it in a manner that protects the banking system from shouldering the weight of billions of yuan in loans that could go sour.

This is the conundrum. Push too hard to reshape the sector (and punish the most reckless of the real estate firms) and risk magnifying the damage across the economy to dangerous levels.

But do too little to change how the industry operates and it undermines the message on moral hazard, encouraging more of the behaviour that has created so much of the current mess.

WiC has been tracking the impact of this ongoing crisis for much of the year as developers fail to finish the construction of residential projects across the country. Frustrated homebuyers are refusing to pay their mortgages until their units are built. The mortgage strike is reverberating through the balance sheets of the construction companies and their suppliers, many of whom have held back on repaying their own bank loans in a situation that could threaten the financial stability of the wider economy.

Knowing this, the developers are counting on a major intervention from the central government, most likely in the form of a bailout that prevents the large majority of companies from going bust. These expectations are also contributing to the slow progress of restructurings at some of the worst afflicted firms, which are holding out for better terms.

Frustrated by the slow progress in their cities, some local governments have been trying to get the work moving again by threatening the developers with further action. Zhengzhou, the provincial capital of Henan, has just issued a warning that construction has to restart on stalled projects in the city by October 6. The threat is to “rain down regulatory pain” on firms that fail to cooperate, Caixin adds, with warnings of new investigations into instances of embezzlement and tax evasion if they fail to comply.

Developers are also being compelled to return the cash that homebuyers have paid into escrow accounts that was then allocated to purposes other than completing the projects concerned, the local government said.

Taiyuan, a city in Shanxi, followed suit this week with an announcement that it has ordered 41 developers to move forward with construction at more than 50 projects where they have breached their commitments to homebuyers.

Of course simply ordering real estate bosses to get back to work isn’t going to solve the problem, especially when the credit crunch that resulted from the ‘three red lines’ directive has deprived developers of the loans they need to meet their commitments on time.

Local governments will also find it harder to fund a rescue effort because of the slowdown in the property sector. City and provincial authorities have traditionally relied on sales of land to real estate firms for a major proportion of their fiscal income. But many developers aren’t in a position to make new purchases of land because of the need to “prioritise liquidity preservation over land replenishment,” a report from Fitch Ratings warned last month.

In fact nationwide revenue from land sales dropped by just over 42% in July to Rmb2.4 trillion ($344 billion), compared to a year earlier, Fitch adds.

Commentators have generally assumed that the central government is going to have to take the lead on some kind of intervention that allows fresh capital into the sector. There have been reports of the outlines of a bailout fund since late July, for instance, which is said to be under discussion by the housing ministry, the central bank and the ministry of finance.

The initial rumours soon triggered a brief rebound in the shares of the country’s leading developers, although there hasn’t been any confirmation of a centrally mandated effort since then, which signals that the government may want to test out responses calibrated to the local conditions first.

Hence the attention being given to events in Zhengzhou, one of the worst affected cities for unfinished homes, where a rescue of sorts seems to be emerging in which cash-strapped developers are being given an option to source new funding from specially created local government financing vehicles.

Backed by emergency loans of Rmb200 billion ($29 billion) from the state banks, plus a contribution from the local government, the capital is intended to get work moving again at stalled projects around the city.

Recipients of rescue cash are being warned that it cannot be channelled into the funding of construction at new projects or for paying off bondholders, for instance.

Progress on the uncompleted projects will also be closely monitored, with “symbolic resumptions of work” set to be severely punished.

The state banks are clearly wary about being left out of pocket in providing the emergency funding as well, with supplicants to the scheme required to pledge some of their other property assets as collateral. Another problem that policymakers need to address in responding to the crisis is the dramatic decline in new home sales in many cities. Potential buyers are understandably cautious about making commitments, having lost confidence in completion schedules or simply expecting prices to fall further as a result of the crunch in property prices.

Policymakers are trying different ways to reverse some of that sentiment, including making it easier to finance new purchases.

At least 24 cities have announced rule changes in which homebuyers can now access new sources of finance from the housing provident funds of family members, Securities Daily said last week, in what looks like a bid to encourage more interest from first-time buyers.

ThePaper.cn also reported this week that officials in Hangzhou have launched a new programme in the county of Chun’an in which developers can list unsold stock in a scheme offering subsidies to differentiated groups of buyers, including graduates and entrepreneurs, and purchasers that buy multiple units.

Another response to the storm in the property sector is coming from the city of Jinan, where the authorities are going to buy 3,000 homes from developers and put them on the rental market in an investment plan that will cost at least Rmb3 billion, CBN says.

The goal is to reduce the unsold stock of homes in the city, which should also help to put a floor under the prices of new-build property in surrounding neighbourhoods, as well as giving local property firms a desperately needed transfusion of cash to finish their uncompleted projects.

The Jinan initiative may be repeated in other cities, the state media reckons, with a number of local governments planning to issue special-purpose bonds to bring more unsold homes into their social housing programmes.

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