China's real estate: on the mend, but what's next?

Interpreting recent policies and their impacts

Real estate is a pillar of China's macroeconomy and has always been a key focus for Baiguan. We have published numerous articles on this topic, including policy interpretations after the new policy release on May 17th (How to Understand Chinese Real Estate Optimization Policies on May 17th) and updates on the subsequent policy effects in August.

Since the end of September, there has been a flurry of real estate policies. In today's article, we will synthesize market perspectives to systematically organize and interpret the recent multi-departmental support policies for real estate. Drawing on Baiguan's exclusive real estate data, we will showcase the policy's stimulating effects based on September's monthly and the first 3 weeks of October's sales performance and housing price trends. Additionally, we will discuss the challenges of easing the difficulties and key indicators to watch for in the future.

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China's housing market: a major influence on household wealth and consumption tendencies

The real estate market in China accounts for a significant portion of household assets (China over 60% vs US less than 30%), but the stock market's share is comparatively low (China around 5% vs US more than 20%). The housing market is closely tied to the wealth growth and consumption tendencies of residents. Over the past decade, the housing market has been particularly crucial for the wealth accumulation of Chinese people, and it could be said that the formation of the middle class largely depends on the rapid rise in property prices. However, in the last two years, the decline in property prices has had a negative impact on future income expectations and consumption tendencies. At Baiguan, we have also frequently discussed the topic of consumption downgrading.

Real estate policy combo: targeted measures for both supply and demand sides

Since September 24th, the Chinese government has introduced a series of real estate policies that clearly demonstrate China's governance structure and policy implementation approach:

Firstly, vertically—from the central government to local authorities: In July, the third plenum set the tone for a more proactive stance on the real estate industry, emphasizing its significant and systemic impact on the macroeconomy and the industry's important positioning ("房地产市场规模大、牵涉面广，对宏观经济运行具有系统性影响，强调房地产行业的重要定位"); by the end of September, the Political Bureau of the CPC Central Committee emphasized "promoting the stabilization and recovery of the real estate market, strictly controlling the increase in commercial housing construction, optimizing the existing stock, and improving quality (促进房地产市场止跌回稳，对商品房建设要严控增量、优化存量、提高质量)"; subsequently, first-tier cities like Beijing, Shanghai, Guangzhou, and Shenzhen have further relaxed purchase restrictions, reduced down payment ratios, and promoted the repair of the demand side.

Secondly, horizontally—inter-departmental collaboration: From the Ministry of Housing and Urban-Rural Development, China Banking and Insurance Regulatory Commission to the Ministry of Finance and the People's Bank of China.

On October 12th, a press conference was held by the State Council's Information Office. The conference indicated that local special bonds, special funds, and tax policies would be used to support and promote the stabilization and recovery of the real estate market. On October 17th, another press conference was held on "Promoting the Stable and Healthy Development of the Real Estate Market," announcing a combo of real estate policies: "Four Cancellations, Four Reductions, Two Increases." The Ministry of Finance stated that it would push for the swift implementation of policies using special bonds to purchase land reserves and acquire existing commercial housing.

Additionally, on October 21st, both the one-year and five-year LPR rates were reduced by 25 basis points (bp), aligning with the expectations set by the central bank. According to the central bank's announcement, the one-year LPR rate was lowered by 25 bp from 3.35% to 3.10%, and the five-year LPR rate and above was reduced by 25 bp from 3.85% to 3.60%. This reduction is consistent with the expectation of "a 0.2 to 0.25 percentage point decrease in the LPR" given by Central Bank Governor Pan Gongsheng at the Financial Street Forum on October 18th. Since 2024, the cumulative decrease for the one-year LPR rate has been 35 bp, and for the five-year LPR rate and above, it has been 60 bp. Following the unified adjustment to reduce the existing housing loan rates to LPR minus 30 bp (on September 29th), this separate adjustment of the LPR indicates a significant reduction in interest rates since September. The aims are:

1. To reduce the costs for homebuyers and unleash consumption potential.

2. To alleviate the downward pressure on asset prices: According to analysts at Guotai Junan, the current real interest rates are relatively high, leading to higher required returns on assets. Therefore, lowering interest rates helps to reduce the required returns on assets, decreasing the downward pressure on asset prices.

Conclusion 1: The policy leverage on the supply side is constrained by local fiscal strength.

The policy focus is primarily on stimulating residential demand and alleviating supply-side distress.

On the supply side, according to our survey of analysts from top investment research institute, the impact of government intervention may be relatively moderate. The target of adding 1 million urban village renovation units, while ambitious, falls short compared to the scale of the shantytown renovation from 2016 to 2018; and considering the fiscal conditions of local governments and the quota of special bonds, the implementation is expected to be challenging. Moreover, the optimization of the financing mechanism for real estate whitelist projects, although helpful in saving interest costs for developers, involves mostly refinancing rather than new funds, which has a weaker impact on overall project delivery.

Conclusion 2: Demand-side stimulus shows positive signs, but more is needed...

This exclusive content for our paid subscribers will provide insights into how the real estate market responds to policy stimulus in terms of household demand. However, these positive signs are not yet sufficient to ensure a comprehensive market recovery, and more indicators need to be monitored to assess the effectiveness of the policies.