China needs to inject about 2 trillion yuan (US$276 billion) into its crisis-hit property market to mop up some 10 per cent of the housing inventory and stabilise property prices, Goldman Sachs said in a report.
The figure is based on the excess inventory of 20 trillion yuan the investment bank estimates exists in the 80 mainland Chinese cities it tracks.
“So far, the scale of policy support is not sufficient to move the needle but we expect more is on the horizon,” analysts led by Yi Wang wrote in the report on Monday. They were referring to the rescue package unveiled by Chinese authorities last month, including a 300 billion yuan relending facility that allows state-owned enterprises to buy unsold homes.
The People’s Bank of China also removed the national lower limit on mortgage rates, and lowered the down-payment ratio for first-time and second-time buyers. Last month, major Chinese cities including Shanghai, Guangzhou, and Shenzhen, lowered mortgage rates and relaxed home purchase restrictions to lure buyers.
10:57
Boom, bust and borrow: Has China’s housing market tanked?
Boom, bust and borrow: Has China’s housing market tanked?
However, it is “yet to translate into higher transaction volumes” despite positive signals in leading indicators such as traffic and property search activities, the US bank said, citing four-week transaction changes in five select big cities. New home sales continued to fall in all of the cities, whereas only two out of five showed an increase in prices in the secondary market.
Meanwhile, a “deep discount” of more than 30 per cent might be needed to entice local state-owned enterprises to scale up their purchases of nationwide inventory, Goldman Sachs estimated. It also expects that developer liquidity will not improve unless policy support lifts household confidence in property prices.
“It may seem to some investors that property prices might be approaching their ‘fair value’ and all that’s needed for property prices to stabilise is for household sentiment to improve,” it said.
Moreover, hurdles remain as the “shadow supply” from secondary markets could be sizeable and add to the inventory following three years of price declines and weaker household balance sheets, it warned.
It might compete with new home supply, making clearing inventory for both primary and secondary markets a very drawn-out process, according to Goldman. “We estimate that vacant homes and invested homes during prior decades total around 90 million to 100 million units.”
China’s housing market crisis germinated from Beijing’s “three red lines” policy launched in August 2020, depriving weak developers of funding lifelines and triggering more than US$160 billion of junk-bond defaults on the basis of Goldman Sachs estimate.
In a separate analysis in April, Goldman Sachs estimated that Beijing may need to spend more than 15 trillion yuan to fix the problems plaguing the sector, including 7.7 trillion yuan towards trimming the inventory of unsold homes to levels last seen in 2018. The excess inventory has been mounting since mid-2021 and has remained higher than previous peaks in 2015, according to Goldman.
Transacted home sales saw a mild uptick in May, with the top 100 developers recording 322.4 billion yuan of sales last month, up 3.4 per cent from April, according to China Real Estate Information Corporation. Still, aggregate sales fell 33.6 per cent from a year ago.