With the goal of establishing a long-term real estate regulation mechanism, the People’s Bank of China (PBOC) has proactively promoted a prudential management mechanism for real estate finance.
In August 2020, the central bank and the housing ministry jointly issued the “three red lines” policy for 30 major property developers. Then, in December 2020, the PBOC and the banking regulator set caps on the share of outstanding mortgages and developer loans in total loans, in a bid to control their growth. These two policies echoed each other and soon achieved results in curbing leverage in the real estate sector. After China Evergrande Group became mired in a debt crisis earlier this year, market expectations for the real estate industry have nosedived.
Read more Caixin’s coverage of Evergrande’s debt crisis
Policymakers’ stance of “houses for living in, not for speculation” is in line with the public’s long-term interests. Many still need to buy a new home or to improve their housing conditions.
Suppressing asset bubbles created by housing speculation while supporting real and reasonable demand for property requires a higher level of macroeconomic regulation as well as monetary and financial supervision. That means, regulators need to carry out market-oriented and risk-centered supervision, so commercial banks can allocate financial resources based on the risk levels of each real estate project and the overall market, thus supporting the healthy development of high-quality developers and meeting reasonable market demand for properties.
However, commercial banks, bondholders and homebuyers have become more cautious now, sometimes even overcautious. This is institutional investors’ method of proactive risk control, or perhaps a choice that they believed to be politically correct. Since the middle of this year, many homebuyers have been waiting to see whether urban housing prices have reached a historic inflection point, which postponed some reasonable home purchasing. A variety of factors, including the resonance of policies, made market expectations on the real estate sector turn pessimistic. The dollar-denominated real estate bond market was the first to come under pressure, followed by some developers’ defaults and credit rating downgrades. Meanwhile, developers faced further tightening credit supply from banks. As a Moody’s report said, China’s property sector is already in a negative credit loop.
How to break this loop? Stopping market-oriented credit rating businesses and blocking the normal transmission of information cannot solve this problem, but will only aggravate panic.
Financial supervision is an important tool to promote the healthy development of the real estate market. But it may not be a fundamental solution. The government needs to tackle this issue from multiple angles. Deepening reform of the central and local governments’ fiscal systems is the core, which is the fundamental way to help local governments avoid excessive reliance on land sales revenue. Also, relevant government departments should make proper policy arrangements to help developers get out of the rut of high leverage.
The pilot property tax has received positive comments from many credit ratings agencies. It may help the market avoid the dilemma that homeowners dare not sell properties, buyers dare not purchase properties, banks dare not issue mortgages, and developers dare not resume the construction of real estate projects. However, the reform of the fiscal and taxation system cannot be easily achieved. China needs to carefully consider the adjustments of interests and the relationship between the central and local governments. It also needs to tweak policies in a timely way based on feedback from the pilot program.
In the process of building up a long-term real estate regulation mechanism, China needs to keep a certain degree of flexibility in monetary and financial supervision. The government should be fully aware of the relationship between real estate and the financial market, and calm unnecessary panic in a timely manner.
Ling Huawei is managing editor of Caixin Media and Caixin Weekly.
This article has been edited for length and clarity.
Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)
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