China might benefit from a small amount of real estate speculation. The most recent policy direction from Beijing includes the words "reducing housing inventory," and the ideological tenet of President Xi Jinping that "houses are for living in, not for speculation" has vanished. It harkens back to an attitude that existed before the latest real estate boom.
If the year 2015 is any guide, the Chinese Communist Party's highest decision-making body's policy adjustment last week makes it possible for local governments to incorporate developers' unsold inventory into social housing. Ten years ago, after authorities attempted to reduce leverage in the financial system, clearing the inventory of homes became a top policy objective. A number of defaults and a decline in house prices were the results of that crackdown.
Then, local administrations started large-scale initiatives to revitalize shanty towns. In order to encourage people to purchase new residences, they directly gave citizens impacted by urban regeneration projects financial compensation by using loans from the central bank's promised supplemental lending program. Between May 2015 and the end of 2018, outstanding PSL increased by five times to 3.25 trillion yuan ($450 billion), according to the People's Bank of China. There was a bull market that followed.
Ironically, such destocking allowed developers like Country Garden and China Evergrande to quickly expand by using leverage once more. 648 million square meters of unsold real estate were on the market as of the end of August 2023. Reportedly, 7.2 million dwellings would fit that description based on the average 90-square-meter home size.
It appears that Beijing is ready to access this treasure trove of trapped wealth. Municipalities that are heavily indebted are attempting to develop social housing projects out of some of their remaining stock. Once more, the state lenders and central bank must provide substantial financial support for this.
But the private sector will be another source of demand for inventory if President Xi is to carry out his plans for a "new development model" for the industry. The leader of China desires a two-tiered market in which affordable housing is provided by local governments while investors and upgraders participate in a smaller private home market.
Authorities in Beijing and Chongqing are lifting restrictions on home purchases, which indicates that real estate is still a viable means of generating and preserving wealth. It also brings speculation back into the open.