Supply-side reform key to clearing housing inventory
Residential apartment buildings stand in the new district of Kangbashi in Ordos, Inner Mongolia, China. Photo: Nelson Ching | Bloomberg | Getty Images
 
While the housing market in big cities like Beijing, Shanghai and Shenzhen has strongly rebounded and registered record trading prices in the first half of 2016, sales remain stagnant in smaller cities of the country. Amid the growing disparity between major centers and less-prosperous areas, analysts suggest to renovate the existing “supply-side reforms” in the sector. 
 
In mid-December 2015, the annual Economic Work Conference first set property “destocking” as one of the top five economic priorities, and rolled out measures to encourage sales of inventory properties in third or fourth-tier cities by allowing migrants working locally to acquire hukou, encourage developers to cut prices, develop rental markets and remove some outdated restrictive policies. All of the moves are interpreted as“supply-side reforms” in the housing market.  
 
“Now, we’ve seen a polarization in China’s housing market which is now not only burdened by oversupply, but risks brought by high leverage, and climbing cost of land, financing, construction materials, and labor,” said Liu Zhifeng, former deputy minister of the Ministry of Housing and Urban-Rural Development at an international seminar on sustainable development of China’s real estate sector. 
 
Making “supply-side reforms” work would help solve the problems and revive the industry, according to him. Several economists advocating the idea explained that there is oversupply and mismatch in the housing market, meaning that property products fail to meet what customers really need. And the idea “supply-side reforms” is targeted at solving the problem besides just limiting the supply to clear inventory.
 
Challenges and flawed products 
 
“China’s real estate development always accompanies its urbanization process. Due to the differential in distribution of resources, different cities are now at different phases of urbanization and this polarizes their real estate markets,” Wang Jueling, an expert in real estate policy and former director of the policy research center of the Ministry of Housing and Urban-Rural Development, told sino-us.com. 
 
Currently, it is known that many lower-tier cities are suffering from housing supply glut while in major centers like Beijing, Shanghai and Shenzhen, and some tier-two cities where the market is red hot, the concern is that the prices are overinflated. Although the inventory is down for three months in a row, the ground floor area for sale in the commercial and residential market is registered at 0.72 billion square meters based on official statistics. 
 
Besides the task to clear inventory, Chinese regulators are getting vigilant about increasing leverage in the sector. In the backdrop of the financial crisis in 2008, China initiated a series of economic incentives and directed huge amount of social capital into the real estate sector. And thanks to the easing monetary policies since the mid-2014 to stimulate a cooling market, from the start of 2016, China’s housing market has ushered in a recovery that’s dubbed by industry insiders as “hitting the ceiling”. The rebound is seen as being fueled by easy credit, or financial leverage, which not only meets absolute demand but opens the door to speculators. Some industry insiders warn if leverage risks continue to climb, and the property bubble continues to grow, once tight financial policies come, there would be a burst. 
 
Rising cost is an emerging problem for the industry. Besides higher cost of financing, materials and labor, the sharp rise in land cost is outstanding. These days have seen real estate developers under pressure of buying land expansively and paying higher compensation for demolition. “Especially nowadays, it’s common for us to witness new records being set in the land auction market. It’s not good and I’m concerned about it,” said Liu Zhifeng in his keynote speech.An industry insider who didn’t want to be named told sino-us.com China’s government has encouraged developers to discount prices in order to clear inventory in smaller cities, while the problem is that the high cost of buying land has left real estate developers little choice. “Price-cutting would bring them chronic death,” he said. 
 
Despite rapid development of housing market over the past two decades, when it comes to providing really worthwhile products, most developers are still lost. The fact is, according to Liu Zhifeng, the players are still competing with each other with house type, ground floor space and locations. They would not pay much attention to design, technical standards and support services. For example, some projects would be open for sale before necessary public resources like transportation, commerce,education and medical care are put in place and thus soon degrade into being uninhabited. 
 
Li believes for addressing all the challenges, the “supply-side reforms” should be more specific and concrete. 
 
First, in lower-tier cities where inventory is high and developers have to wait long periods for money to return, land supply should be decreased or suspended. Second, high-quality and eco-friendly projects should be encouraged by specific incentive policies, like preferable credit and tax reduction. Third, procedures should be simplified to facilitate migrant workersget loans for housing and register permanent residence in the cities where they work and live. 
 
A good example
 
In Kunming, the capital and the largest city of southwest China’s Yunnan province, the local government has decided to promote a good example set by a nursing home to combine the elderly care industry with inventory clearing initiatives at a municipal meeting in July. 
 
Based on official statistics, the city had 7.25 million square meters of commercial residential buildings for sale between January and April this year. The local government is under pressure to destock the high inventory. 
 
Meanwhile, the local government is also encouraging private investment in the elderly care industry considering the city has stepped into an aging society from 1991 and by December 2014, registered residents over 60 years old had reached 872,400. The industry has seen some development over the years and thanks to the city’s favorable climate conditions, a large number of private businesses see investment potential in the sector. 
 
On April 17, 2015, a community elderly care center called Lovely Families invested by five private businesses started operation in the city’s Panlong district where many housing projects are situated. BaishaRunyuan residential community, a project developed by Vanke, one of China’s top real estate developers, has worked with Lovely Families to provide the space of 200 square meters for entertainment activities and sell or rent out flats for the center to provide day care and catering services. 
 
It is reported by several local media sources that with the highlight of elderly care service, BaishaRunyuan apartments were sold out completely within a short period. 

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