58 Finance & economics The EconomistJanuary 30th 2021
2 tivised to make their monthly mortgage
payments, limiting the risk of a vicious cy-
cle of defaults, forced sales and collapsing
prices. In many of the most populous cities
demand is also tightly restricted, because a
hukou—a local residency permit—is a pre-
requisite for buying a home.
As the property sector has swollen, the
government has pledged to develop what it
calls “a long-term mechanism” for stabilis-
ing prices and investment. The property
market is, in its view, too important to be
left to the market alone. In practice this has
meant layering on ever more rules. Cities
such as Shanghai and Hangzhou started re-
quiring developers to run lotteries for new
flats, with priority given to people who do
not own homes. Many others have all but
barred people from buying second homes.
These often make for cat-and-mouse
games. Since the second-home ban applies
to families, not just individuals, some cou-
ples have obtained fake divorces in order to
buy another house. On January 21st Shang-
hai ruled that divorcees must wait three
years to count as first-time buyers if they
had owned a home when married.
The government is also now reining in
the most indebted real-estate firms. Late
last year the central bank and the housing
ministry said they would start assessing
developers’ leverage on the basis of “three
red lines”—one, for example, is that their
liabilities should not exceed 70% of their
assets. Only 11 of the biggest 100 developers
would be given a passing grade on all three
measures, according to Plenum, a consul-
tancy. The others need to find a way to get
inside the lines; if not, they will face strict
caps on future financing.
The resulting dynamic offers a case
study in how regulation changes the shape
of the market. Some developers are work-
ing to pare their leverage by attracting new
investors or by spinning off subsidiaries,
such as their property-management arms.
For many, though, the obvious first step is
to boost cashflow by selling more houses
more quickly, leading them to cut prices.
r&fis one of the big developers feelingthe pinch. At one of its new developments
in Jiangmen, a city in the southern prov-
ince of Guangdong, it has cut prices by 20%
in recent months. Sales, once slow, have
soared—averaging about 15 homes per day.
Even on a weekday afternoon a steady flow
of prospective customers walks gingerly
around construction debris to check out
the flats still being built. One agent, his hair
coiffed like a South Korean pop idol, boasts
that he alone sold 18m yuan worth of units
in December, though that was only enough
to rank third among his colleagues.Beneath the placid surface
Viewed narrowly, the many interventions
have worked. In the biggest cities prices
have basically been flat in inflation-adjust-
ed terms over the past four years. Annual
property sales nationwide have remained
at the same level during that time, while
new starts have been broadly in line with
sales. A scheme to demolish old rickety
homes and give their owners cash to buy
new ones helped mop up unsold units in
small towns. It would take just about ten
months to clear all inventory at the current
sales rate. “The property sector really is
healthier than it used to be. The govern-
ment has so many levers now,” says Zhang
Sisi of Jinan University in Guangzhou.
But this calm engenders a different kind
of concern. The many rules have not just
made for a healthier market; they have
made the market. Take the price stability.
When developers win land auctions in big
cities, they must set prices within a range
prescribed by the government. A perverse
outcome is that new homes can be a third
cheaper than second-hand ones in the
same neighbourhoods. Hence yet another
rule: to stop people flipping their new
homes for a tidy profit, several major cities
have slapped a penalty on owners who sell
within five years of buying. The lotteries,
meanwhile, act as quotas to dictate the size
of the market. Prices may be under control,
but much demand is simply going unmet.
From this vantage, the becalmed market
begins to look less like a success story andmore like a pressure cooker. So in yet an-
other intervention, officials are trying to
let steam out of the biggest cities by guid-
ing people to smaller ones—specifically, in
the clusters of satellite towns being built
up just outside metropolises. These towns
are linked to the cities by high-speed trains
but have much lower thresholds for new-
comers wanting a hukou. To make them at-
tractive, the government is also investing
more in hospitals and schools. “Sometimes
it takes the education ministry, not the
housing ministry, to fix problems in the
housing market,” says Ms Zhang.
Developers seem to be responding to
this policy push. The most fertile ground
for the city clusters are four prosperous
coastal provinces (Guangdong, Fujian,
Zhejiang and Jiangsu). Last year these
made up 34% of all property investment in
China, compared with 26% a decade ago.
Developers are “no longer buying up big
parcels of land anywhere in the country”,
says Xiao Wenxiao of cric Research, a con-
sultancy. “Now they are focusing on small-
er plots in prime areas.” The flow of new
homes in China, in other words, appears to
be better situated than the stock.
A key question, then, is just how much
scope there still is for China’s housing
stock to grow. A 22% vacancy rate—the re-
sult of a well-respected survey by the
Southwestern University of Finance and
Economics in 2017—would suggest that the
market is more than saturated. China’s de-
mographics also point to weakening de-
mand. The working-age population, the
cohort that buys the most homes, is already
shrinking. And the pace of rural-to-urban
migration, another big source of demand
in cities, has started to slow, too.
Nothing about the Chinese housing
market is ever so straightforward, though.
The 22% vacancy rate largely reflects the
overbuilding of small towns. In and
around big cities vacancy rates may be less
than 10%, low by international standards,
according to China International Capital
Corp, an investment bank. Much of the
housing stock is still shabby. A tenth of
flats in cities do not include their own toi-
let. And many among the growing middle
class, having spent a good portion of the
past year locked down, are deciding that
they want slightly larger homes.
Totting this all up, the baseline forecast
of China Index Academy, the country’s larg-
est property-research organisation, is that
housing sales will fall by 4% or so annually
in the coming half-decade, going from
roughly 15m units sold in 2020 to 13m in- That would be a challenge for China;
long a pillar of growth, the property sector
would become a drag. At the same time, it
would be a gradual slope down, not a col-
lapse, for the once-vertiginous market. If
you listen closely enough, the ticking of
the time-bomb sounds a little fainter. 7
What’s the situation
China, average house price
June 2010=100Source:Wind1225
200
175
150
125
100
75
20181614122010Mid-sizedcitiesLarge citiesMega citiesShifting stock
ChinaSource:Wind22015105020151050
052002 10 15 20Months required to sell
all available homesNew houses
started, m