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While housing rescue policies may help provide stimulus to property markets, the economic fundamentals currently unfolding in China are unfavourable to their implementation, writes Yixiao Zhou from The Australian National University.
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China has one of the world’s highest housing price-to-income ratios at 29.59. China also has a low lending interest rate at around 4 per cent. Considering this, the room for expanding the mortgage scale is limited, constraining the ability of easing lending rules to stimulate housing demand.
Another short-term demand factor is the transfer of rural homestead land. In June 2024, Nantong, a city in Jiangsu province, introduced new policies that allow individuals who voluntarily relinquish their rural homesteads and buy homes in urban areas to receive financial subsidies. Nantong is not alone in this initiative. Encouraging the voluntary and compensated relocation from rural homesteads has become a key focus of real estate policies. But this does not seem to have affected the decreasing trend of housing prices either.
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If downward adjustment in property prices leads to real estate loan default, this will pose major risks to financial stability. Japan’s experience with a massive real estate bubble burst in the early 1990s provides a crucial lesson for policymakers in China. The sharp downturn in the real estate sector led to a prolonged period of economic stagnation known as ‘Japan’s lost decade’.
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Ultimately the structural problems holding back demand for properties could be solved by reforms in land allocation, financial market regulation and urbanisation policies. These reforms could help reposition China’s property sector on a healthy and sustainable growth path.