Why China needs to fill its empty homes
If not another flat was built and sales continued at their current pace, it would take eight years to sell all the homes lying dormant around Luoyang, a city of 7m in central China. The region is a hot spot for the country’s property crisis, where years of overbuilding have turned entire districts into housing graveyards. Sprawling wastelands of concrete and glass scar the city.
The extent of China’s overbuilding has been contested for years. Tales of “ghost cities”—entire districts of unsold homes—started making headlines in 2010, followed by reports several years later about how empty areas were filling up. A former deputy head of the government’s statistics bureau said last year that the entire population of China could fit into the country’s vacant homes. Some experts still argue that the true number is smaller, but local analysts estimate that in July there were 32m unsold homes; idle properties, or ones that have been bought as investments but are not lived in, could add another 49m.
One thing most agree upon is that China’s economy cannot be fixed without first rescuing the housing market. The country’s leaders believe the easiest way to do that is to focus on idle flats. Since September 24th officials have announced a range of measures to prop up the economy. Notably, the central bank changed the terms on a 300bn yuan ($42bn) lending facility, allowing commercial banks to refinance 100% of loans to state-owned enterprises (SOEs), up from 60%, with the lending intended to enable SOEs to buy unsold flats and turn them into social housing. At a meeting of the Standing Committee of the National People’s Congress that is set to start on November 4th, leaders may earmark 4trn yuan in special bonds that local governments can use to buy unused land and unsold homes over the next five years, according to Reuters, a news agency.
By targeting unsold homes, the government believes it can fix some of the economy’s most glaring problems. With so many flats on the market, developers are hesitant to start new projects. When they halt construction they also stop leasing government land—a shock to heavily indebted local governments, whose main source of revenue is land leasing. A glut of homes has also forced developers to slash prices. This has, in turn, sapped confidence from people who not long ago put most of their wealth in the housing market, leading to a dramatic collapse in sales. Spending on new homes will probably fall from more than 16trn yuan in 2021 to about half of that this year. Analysts at S&P Global, a rating agency, have put it succinctly: “Too much stock, too little confidence.”
Extra funds would be welcome in Luoyang. Five years ago the towering, overwhelmingly empty apartment complexes in its Yibin district meant the area was labelled a ghost town. Now there are signs of life: some new projects had been fully sold by late October. But the area is still uncomfortably empty. Estate agents say they expect many flats for sale to end up being held by developers as collateral for loans instead of becoming family homes.
Since the government changed its tune on the economy in late September, there have been signs that things are improving. Home sales rose during a recent holiday. A handful of measures, such as lower mortgage rates and relaxed sales restrictions in big cities, probably helped convince people to buy. Some cities have been forced to ease price controls, leading to sharp drops in prices. The closer they get to true market rates, the faster sales will occur.
Yet analysts fear the government’s plan will ultimately fall short of fixing the market. It does not focus enough on uncompleted flats for which payment has already been received, a nightmare scenario that puts off buyers. Households are waiting for over 20m such homes to be finished; the developers of many are bankrupt. At the same time, local officials do not seem that interested in buying unsold homes. Of the 300bn yuan made available in May, just 4% had been used by the end of June. The cost of servicing debts is expected to be higher than the returns officials can make.
Tianfeng Securities, a broker, reckons that it would cost the central government 7trn yuan to buy all the country’s idle flats. That is far more than the state appears willing to spend. As a consequence, cities such as Luoyang are likely to be working through unwanted housing for many more years to come. ■
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