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Property

China's housing price declines spread to more than half of provinces

Debt-laden local governments scramble to defend key source of revenue

Real estate brokerages in the southern Chinese city of Shenzhen. (Photo by Yusuke Hinata)

BEIJING -- Housing prices have fallen in a majority of China's provinces for the first time in more than six years as the government tries to tame a real estate bubble, sending debt-laden local authorities rushing to put a floor under the declines.

Sixteen out of 31 provincial-level divisions, which include cities directly administered by the central government, logged price declines in August, the most since March 2015, official data shows.

As tax cuts aimed at stimulating the economy cut into revenue, cities have come to rely even more on land as a financial lifeline. But the central government's curbs on real estate speculation threaten these flows.

The situation may be worse than the official figures suggest. Real estate developers, struggling to access capital, are rushing to unload inventories for quick cash. Online chatter says properties from crisis-stricken China Evergrande Group and other developers are starting to sell at half the original price.

Land in China is subject to state or collective ownership, and local governments sell usage rights to property developers to build housing or commercial facilities. Income from such sales in 2020 was equivalent to more than half of the total tax revenue collected by central and local authorities.

To stem the price declines, Yueyang and Zhangjiakou have since August barred developers from selling new properties at discounts of more than 15%. Unloading properties for less than they cost to build has been banned in parts of Wuxi. Around 10 mostly lower-tier cities have imposed restrictions on lowering real estate prices, according to Chinese media.

Cities are also trying to reignite demand. The industrial hub of Harbin in hard-hit Heilongjiang Province this month began offering subsidies of as much as 100,000 yuan ($15,500) to first-time homebuyers with advanced degrees. Government-funded mortgages are now available for existing homes up to 30 years old, compared with the previous 20-year maximum.

The central government's efforts to cut down on speculation in urban condominiums, through such measures as tougher mortgage screenings, have begun to cool down the market. Prices for new homes on a per-area basis fell 2.7% on the year in August, according to the National Bureau of Statistics, marking the first decline since April 2020.

Housing under construction in Kunming in 2019. Yunnan Province is among the areas logging double-digit declines in housing prices this August.   © Reuters

But the restrictions have also exacerbated shrinking demand in small and midsize cities facing outflows of residents. Heilongjiang in the northeast saw the steepest drop in housing prices in August at 21%. Yunnan and Guizhou provinces in the south registered double-digit drops, as did the inland Ningxia Hui Autonomous Region.

Lower condominium prices affect the market for the land that new housing stock is built on. With developers short on cash, land auctions have increasingly struggled to attract buyers.

Revenue from land sales shrank nearly 20% on the year in August, according to the Finance Ministry, the sharpest drop since August 2015.

Lower income makes it more difficult for cities to repay the piles of debt both on and off their balance sheets.

A report by the Chinese Academy of Fiscal Sciences, a state-affiliated think tank, estimated the amount of "hidden" debt held by local governments at 21 trillion to 45 trillion yuan ($3.3 trillion to $7 trillion at current rates), as of the end of 2018 -- more than the publicly disclosed total of 18 trillion yuan.

In advanced economies, taxes imposed on property owners provide local governments with a steady revenue stream. A reform plan approved by a plenary session of the Communist Party's Central Committee in 2013 -- the year that Xi Jinping became president and the year after he took power as the party's general secretary -- called for legislation on property taxes.

This has been repeatedly put off, reportedly because of objections from senior party officials who own or have relatives with large landholdings in major cities. But property taxes could bring China a step closer to reining in speculation while stabilizing local government finances.

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