China restricts construction of new homes to combat surplus in housing stock

In an effort to address a persistent property slump in the world's second-largest economy, China has implemented new restrictions on housing construction in certain areas. The aim is to curb the addition of new housing and reduce a mounting inventory of unsold homes.

The new measures affect cities like Guangzhou, Shenzhen, and Hangzhou, which have taken more than three years to reduce their stock of unsold residential properties. As a result, these cities are prohibited from future land sales for residential construction to real estate companies. Cities can resume selling land once inventories drop below the three-year threshold, and in cases where the clearance period is between 2-3 years, sales are capped based on the amount of existing housing that has been sold to buyers.

The new restrictions on land sales will impact an important income stream for local governments, which in many cases is as significant as tax revenue. The restrictions prevent local authorities from selling land usage rights to developers in cities with unsold housing inventories that would take three years or more to clear.

Tianfeng Securities estimates that RMB 7 trillion (USD 966 billion) would be needed to bring the nationwide housing supply down to appropriate levels. This estimate underscores the magnitude of the challenge facing Chinese authorities.

The current program, while significant, is considered too small to significantly reduce the housing inventories that have accumulated over the past two and a half years. The average price of newly built housing in 70 major cities decreased by 0.6% in April, marking the sharpest drop since November 2014. Sales of newly built housing during the Labor Day holiday in early May dropped more than 40% on the year by floor area, representing a significant decrease compared to 2019 before the Covid-19 pandemic.

Nationwide housing inventories increased by 24% by floor area at the end of April compared to the previous year, according to data from the National Bureau of Statistics. Local governments' land sales revenue decreased by 33% in 2023 compared to the 2021 peak.

The decline in housing prices puts pressure on debt-laden property developers, increasing default risk and leaving banks with more bad debt. There is little evidence of a recovery in demand for housing. Economic uncertainty and expectations of further price declines are causing potential homebuyers to stay on the sidelines.

In a bid to alleviate the issue, the government initiated a program in May to purchase unsold housing, aiming for RMB 500 billion (USD 69 billion) in funding, mainly from the People's Bank of China.

Land in China is owned by the state, and local authorities auction off usage rights to real estate companies for construction. The new restrictions from the Ministry of Natural Resources limit these sales.

This article was first published on Nikkei Asia as part of 36Kr's ongoing partnership with Nikkei.