Too many unfinished buildings? The Chinese government is considering a "ban on pre-sale houses" system: houses can only be sold once they are completed.

As part of a "new model" of real estate development, the Chinese government is considering restricting the pre-sale housing system, according to Bloomberg, citing people familiar with the matter. What is the impact? (Summary: China's housing rescue market pushes "4+4+2" to stimulate new policies, but the problem of unfinished buildings is difficult to solve... Construction stocks do not rise but fall) (Background supplement: China's housing market! A number of banks cut mortgage interest rates on 10/25, reducing household spending by an estimated 680 billion yuan per year) Much of China's rapid economic development over the past few decades is undoubtedly due to the booming growth of the real estate market. The real estate sector has not only driven urbanization, but has also become an important pillar of economic growth. However, in recent years, China's real estate market has frequently "exploded", from the debt crisis of Evergrande Group to the default of several developers, resulting in a collapse in market confidence, sluggish sales, project stoppages and heightened public concerns about unfinished pre-sale houses, seriously affecting consumption and employment. China is considering restricting the sale of pre-sale homes In an effort to salvage the sluggish housing market, the Chinese government has introduced a number of measures in recent years. For example, since 2022, the central government has introduced a "guaranteed delivery" policy to ensure that unfinished projects can be delivered; At the same time, the central bank also lowered the interest rate of first-time home buyers and relaxed restrictions on house purchases in some cities. In addition, in 2024, financial regulators will further reduce policy interest rates and bank reserve requirement ratios in an attempt to stimulate demand. However, these measures have had limited effect, the market recovery is still mainly focused on second-hand housing transactions, and the new housing market remains weak. Against this background, Bloomberg, citing people familiar with the matter, reported that the Chinese government is considering restricting the pre-sale housing system as part of a "new model" of real estate development. The proposal, which has not yet been finalized, applies to land sold after the new regime comes into effect and targets new residential projects, although local governments will have some flexibility in implementation. Relevant people pointed out that the measure aims to limit the supply of new homes and stabilize house prices, especially in lower-tier cities with large house price declines, and is expected to be more widely implemented. In the past, the pre-sale system allowed developers to sell homes before they were completed, which was also an important driver for the rapid expansion of the real estate market. However, this also comes with a series of potential problems, such as an oversupply of properties and high developer debt. The data shows that when the housing market began to decline in 2021, about 90% of new homes were sold before completion, but last year this proportion has fallen to 74%. At the same time, loan disputes and public dissatisfaction caused by unfinished projects have highlighted the drawbacks of the pre-sale system. What is the impact of restricting pre-sales? This reform could have far-reaching consequences. First of all, the cancellation of the pre-sale system nationwide may exacerbate the financial pressure on developers. The reason is that many developers are already struggling due to limited access to finance and sluggish sales. Raymond Cheng, head of real estate research at BOCI Securities in Hong Kong, commented: "Eliminating the pre-sale mechanism will make developers more conservative as they need to consider cash flow under the new regime. This could lead to a continued decline in new construction projects and real estate investment. Secondly, well-funded developers will have a competitive advantage and be able to buy land and build homes more easily. The reason is that the new model prohibits housing companies from collecting sales payments before the completion of the project, cutting off the practice of developers using pre-sale funds for follow-up investment, which will further exacerbate industry differentiation. Housing stocks fall in response Affected by the news, Bloomberg noted that China's real estate stock index fell 1.7% after the news, reflecting investors' concerns about the prospects for reform. Market data also showed that new home sales continued to be weak in April, with sales of the 100 largest housing companies falling 8.7% from the same period last year, and the recovery of the housing market may face greater challenges in the context of global economic pressures and the intensification of the Sino-US trade war. In short, China's real estate market is currently facing multiple dilemmas of oversupply, debt crisis and low confidence. Reform to limit pre-sales systems may stabilize house prices, but they may also exacerbate pressure on small and medium-sized developers to survive and inhibit new project starts. Can China's housing market get out of the trough and regain its former glory, or will it slump? Time remains to be seen. Related reports China's strong rescue of the housing market! 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