China has moved to bar housing construction in some areas in its latest attempt to shrink a mountain of unsold homes that is weighing on prices.
The new restrictions stop local authorities from selling land usage rights to developers in cities with unsold housing inventories that would take three years or more to clear—a criterion that more than 40% of major cities meet.
This is part of China’s efforts to deal with a property slump that has slowed the world’s second-largest economy.
In May, the government directed local authorities to arrange purchases of unsold housing, aiming for RMB 500 billion (USD 69 billion) in buying funded in large part by lending from the People’s Bank of China.
This program is seen as too small to make real progress on paring down inventories that have built up over the past two and a half years. Tianfeng Securities estimates that it would take RMB 7 trillion (USD 966 billion) to bring the nationwide housing supply down to appropriate levels.
The new move seeks to rein in the addition of more new housing.
Land in China is owned by the state, with local authorities auctioning off usage rights to real estate companies for construction. The new restrictions from the Ministry of Natural Resources, which oversees land use policy, limit these sales.
Cities can resume selling once inventories drop below the three-year threshold. 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.
Nationwide housing inventories were up 24% by floor area at the end of April compared with a year earlier, according to data from the National Bureau of Statistics.
The average price of newly built housing in 70 major cities slid 0.6% on the month in April—the sharpest drop since November 2014.
Falling housing prices pile pressure on debt-laden property developers, adding to the default risk hanging over the sector, as well as leaving banks grappling with more bad debt.
But the restrictions will hit a vital income stream for local governments that is in many cases as important as tax revenue.
As of March, more than 40% of China’s 100 largest cities would need more than three years to clear their stock of new housing, the threshold for the land auction ban, Caixin reported. This is up from less than 20% at the end of 2022 and around 30% at the end of 2023. At least one city would need more than a decade to clear its inventory at the current pace.
Local governments’ land sales revenue was down 33% in 2023 from the 2021 peak. The 2024 figure is likely to fall further if the limits are applied strictly.
Meanwhile, there is little sign of a recovery on the demand side. On top of economic uncertainty, expectations of a further decline in prices are leading more potential homebuyers to stay on the sidelines.
Sales of newly built housing during the Labor Day holiday in early May tumbled more than 40% on the year by floor area, according to the China Index Academy think tank. The figure is around 30% lower than in 2019, before the Covid-19 pandemic.
This article first appeared on Nikkei Asia. It has been republished here as part of 36Kr’s ongoing partnership with Nikkei.