China has a housing problem. A huge problem. There are nearly 4 million apartments that no one wants to buy, a total of unused living space roughly the size of Philadelphia.
The country’s leader, Xi Jinping, and his top aides have urged the government to buy them.
The plan, announced last week, was Beijing’s boldest step yet to halt a spiraling housing crisis threatening one of the world’s largest economies. But it hasn’t gone far enough.
Behind the empty apartments in China lies a bigger problem: many more homes that developers have already sold but have yet to finish construction — conservative estimates put the number at about 10 million.
The scale of China’s real estate boom has been breathtaking. The extent of the inexorable recession that began nearly four years ago remains vast and uncertain.
China’s leaders were already dealing with an economic slowdown after three decades of double-digit growth before a housing crisis sparked a recession that spiraled out of control. Few experts believe Beijing can move to more sustainable growth without confronting vacant apartments and the developers who overinvested to build them. Builders, painters, real estate agents, small businesses and banks across the country collectively owe trillions of dollars.
After decades of nurturing the biggest real estate boom in world history and allowing it to account for almost a third of China’s economic growth, the Chinese government suddenly stepped in in 2020 to cut off the easy money that fueled the boom, setting off a wave of bankruptcies that shocked home buyers.
It was the first test of Beijing’s determination to wean the Chinese economy off its decades-old reliance on building and construction to keep the economy afloat.
The government now faces a new test of its resolve. To halt past excesses, it has spent the past few years suggesting that real estate companies are not too big to fail. But the collapse of dozens of big developers has completely destroyed what little confidence there was left in the housing market. Since then, authorities have tried everything to restore buyer optimism, but nothing has worked.
With few buyers, the remaining developers are at risk of defaulting on their loans. And they are intricately intertwined with the local banking and financial systems that support village, town and city governments. Research firm Rhodium Group recently estimated that the real estate sector has more than $10 trillion in total borrowing in the U.S., including loans and bonds, only a fraction of which is recognized.
“At the moment, the risk seems like homes aren’t selling, but it’s not. The risk is that more developers will go bankrupt,” said Dan Wang, chief economist at Hang Seng Bank.The first big developers to default, such as China Evergrande, were a hidden problem in plain sight.
Evergrande’s first default in December 2021 sparked fears that China might experience a “Lehman moment” – the collapse of Lehman Brothers in 2008 that sparked the global financial crisis. But the fallout was carefully and quietly managed through policy support, allowing Evergrande to complete construction of many of its apartments. By the time a judge ordered the company liquidated five months ago, Evergrande was effectively no longer a viable business.
But China has tens of thousands of small developers across the country, and the only way authorities can halt the market’s freefall is to rescue some of the mid-sized developers in cities where the crisis is worse, Wang said.
China’s top leaders have instead refocused on the problem of millions of apartments that no one wants to buy and pledged to turn them into cheap public housing. They’ve pledged to spend $41.5 billion to loan state-owned enterprises to start buying up unwanted real estate, totaling 8 billion square feet, of which just over 4 billion are unsold apartments, according to the National Bureau of Statistics.
Real estate company shares initially rose when Beijing’s response was announced last week, but some critics said the effort came too late, and most speculated that much more money would be needed — estimates ranged from $280 billion to $560 billion.
Beijing began to soften its response last year, instructing banks to funnel loans and other funds to dozens of property companies deemed eligible for a government “white list.”
The support was not enough to stop house prices from collapsing.
Policymakers have taken other steps, too. They have slashed mortgage rates by the largest amount on record. They have tried pilot programs to encourage residents to sell their old apartments and buy new ones. They even offered low-interest loans to some cities to test the idea of buying unsold apartments.
According to Chinese economic news outlet Caixin, local authorities have attempted a total of more than 300 measures to boost property sales and support real estate companies.
Still, the number of unsold homes kept reaching new levels. Prices for new homes kept falling. So in late April, Mr. Xi and 23 policymakers began discussing a plan to take some unwanted apartments off the market in a program similar to the Troubled Asset Relief Program launched by the U.S. government after the housing market collapsed.
Last week, China’s top economic official, Vice Premier He Lifeng, held an online gathering of government officials from around the country to deliver the news that “it’s time to start buying apartments.” Shortly thereafter, the central bank pledged to ease mortgage restrictions and lend billions of dollars to help state-owned enterprises buy apartments.
The move underscored how concerned the government was about a dysfunctional housing market.
But as soon as state media reported that He had asked local governments to buy up unsold apartments, economists began raising questions.
Would local governments end up buying up all the unsold apartments? What if they couldn’t find any buyers? And then there’s the question of cost: Economists have calculated that such a program would cost hundreds of billions of dollars, not tens of billions.
Even more worrying to some, the central bank has already quietly launched an apartment buyback program in eight hard-hit cities, promising $14 billion in low-interest loans, of which only $280 million has been used. For the same reasons that consumers are reluctant to buy homes in smaller cities, these governments appear uninterested in accessing the loans.
The big difference now is political will, said John Lam, head of China real estate research at Swiss bank UBS. The country’s most powerful man has said he supports the buyback plan, which will create political pressure for authorities to act.
“Local governments may acquire the apartments even at a loss,” Lam said.
But in areas with declining populations – the cities and towns where developers have expanded most aggressively – there will be little need for social housing projects.
The optimistic view is that Beijing has more plans.
“Beijing is moving in the right direction towards ending its massive housing crisis,” Ting Lu, chief China economist at Nomura Securities, said in an email to clients.
He added that the task was a difficult one that required “further patience in waiting for tougher measures.”
