Chinese Cities Buy Off Housing Glut With Borrowed Money

By Dominique Fong Features Dow Jones Newswires

BENGBU, China -- A push by the Chinese government to ease local housing gluts and fill empty apartments is creating a different headache by driving indebted cities deeper into the red.

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Under Beijing's direction, more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China's Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020.

The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market, which accounts for a third of China's economic growth according to Moody's Investors Service.

It is a sharp illustration of China's economy under President Xi Jinping and the economic challenges he will face as he renews his 5-year term at a twice-a-decade Communist Party Congress that opens on Wednesday.

"The government's creativity in coming up with new ways of supporting the housing market is impressive -- but it's also an indication that it still depends on housing for growth," wrote Rosealea Yao, an analyst at Beijing research firm Gavekal Dragonomics.

China's government used to build homes for families who lost theirs to development or decay. But last year, local governments, from the northeast rust belt to this city of 3.7 million amid the croplands of central Anhui province, spent more than $100 billion to buy housing from developers or subsidize purchases, according to Gavekal Dragonomics.

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Underpinning the strategy is a cycle of debt. Cities borrow from state banks for purchases and subsidies, then sell more land to developers to repay the loans. As developers build more housing, they, too, accrue more debt, setting up the state to bail them out again. The burden on the state rises, as does the risk of collapse.

The government has tried other ways of filling apartments, such as offering cash subsidies to encourage rural migrants to buy in urban areas, but the program is the first large-scale case of the government becoming a home buyer itself.

In May, Lu Kehua, China's deputy housing minister, said the program has "played a positive role in steady economic growth," and called for a push to clear housing inventory as early as possible, according to an article by the official Xinhua News Agency.

The Ministry of Housing and Urban-Rural Development didn't respond to questions about the program sent this week.

Three years ago, Bengbu's housing prices were falling. Housing inventory in 2014 would have taken almost five years to fill at the pace of sales at the time, said Shanghai-based research firm E-House China R&D Institute.

Around the same time, the Bengbu government began to gobble up homes, and it has continued to do so. The city said it bought nearly 6,000 apartments from developers last year.

Housing stock in Bengbu was down to four months in September, a city official overseeing the government program said in September. Home prices had increased by 15% in August from a year earlier. That exceeded the 8.2% growth across a benchmark of 70 cities compiled by the national statistics agency.

Beijing and Shanghai residents are used to such price surges, but it is unusual in a smaller Chinese city lacking any particular tourism or job-market appeal.

Bengbu was once known for freshwater pearls, but its oyster markets are long gone and its economy now centers on grain, peanuts, cotton -- and the housing blocks that now encroach on the farmland surrounding the city. For nightlife, an official from the city's propaganda department pointed to a square where a group of middle-aged women were dancing to Chinese pop and techno beats. "This is it," he said.

In smaller cities, letting housing developments gather moss or fail could have serious consequences. Oversupply discourages developers from starting new projects and depresses prices, making families more wary about spending. Accelerated buying, however, ramps up debt and leaves the financial system vulnerable if prices suddenly fall.

Bengbu officials are wary about publicizing its hand in the market for fear of driving up prices and speculative buying. "We don't mention it as much now as in the past two years," the city official in charge of the program said. "Prices have been fluctuating a lot, and it's a little bit out of control."

The Oriental Metropolis housing project on Bengbu's outskirts broke ground during a building boom four years ago. But excess building dragged down prices and discouraged buyers. The developer was stuck with a large amount of unsold apartments.

In 2015, groups of families on government-organized apartment tours started showing up, said Ding Qian, a planner at the developer, Bengbu Mingyuan Real Estate Development. By October 2016, the developer had sold 20 blocks of finished apartments, about 10% of them paid for with government funds, Ms. Ding said.

"We have run out of apartments to sell," she said. The developer has sped up construction of 42 new blocks, about 4,000 apartments, and has raised prices by 40%.

One new resident, a 26-year-old auto factory worker, said he moved into Oriental Metropolis four months ago after his home was torn down by the government. He used part of his government compensation of 810,000 yuan ($122,000) to buy an apartment for 430,000 yuan. "The apartment is not as good as our village home," he said. "It's much smaller." He said he plans to use the rest of the money to buy another home.

The Bengbu official in charge of the program declined to disclose details about the city's apartment purchases, but said the city had borrowed 10 billion yuan ($1.5 billion) of the 19 billion yuan of available credit extended by China Development Bank for housing purchases and subsidies.

Local governments in 2016 borrowed 972.5 billion yuan from the bank, the government's main housing lender, nine times the level three years earlier, according to E-House China R&D Institute, which compiled data from official bank and government websites. More than half of last year's loans went to purchases or subsidized buying, according to the official Xinhua News Agency. The rest of the loans funded housing projects built by the government.

The government's role in the housing market continues to grow. Of all the residential floor space sold in China last year, 18% was purchased by government entities or with state subsidies, E-House China determined from official government data. The share could reach 24% this year, the firm said.

--Junya Qian contributed to this article.

Write to Dominique Fong at dominique.fong@wsj.com

(END) Dow Jones Newswires

October 13, 2017 05:44 ET (09:44 GMT)