“I’d be too scared to buy pre-sale property if I’m going to buy another home,” said Ma Lin, who lives in the inland city of Zhengzhou.
Ma, 24, bought a pre-sale condominium in late 2020 for 1.6 million yuan (US$219,000 at current rates). The transfer had been slated for September 2023, and Ma felt secure because the project was backed by a major real estate developer.
But construction work stalled in the autumn of 2021 because the developer ran into funding trouble.
This June and July, Ma and other purchasers of the pre-sale condo units tried three times to press the developer and local authorities to resume construction. In mid-August, work on the underground parking garage slowly got underway.
Even so, “I’m not sure if the local officials will intervene to keep the construction going after the Communist Party national congress ends,” Ma said, referring to the gathering in Beijing that closed last weekend.
The Chinese economy expanded a real 3.9% in the third quarter compared with a year earlier, beating expectations but still missing the government’s full-year target of 5.5%. The weak housing market has been an economic millstone.
China under President Xi Jinping has tightened financial controls on the real estate industry since 2021 to bring a bubble under control. This has caused developers to run out of funds and shut down construction on properties before they were finished.
Fed up with delayed transfers of pre-sale homes, the purchasers staged boycotts of loan payments this summer. Potential buyers spooked by the chaos put off purchasing condos, contributing to a lengthy slump in sales.
In the latest quarterly consumer survey by the People’s Bank of China, a record-low percentage of respondents expected housing prices to rise.
Zhengzhou, where Ma lives, is at the epicentre of the turmoil. The city was the site of 13% of the more than 300 payment boycotts staged across the country.
The distrust of pre-sale homes has been so palpable that in August, sales of pre-owned properties in Zhengzhou exceeded sales of new ones in terms of area – an unusual reversal.
Similar trends are afoot elsewhere in China. During the National Day holiday period earlier this month, new-property sales by area were down nearly 40% on the year. But transfers of pre-owned properties jumped more than 50%.
In other words, buyers saw pre-owned as less risky because it has already been built. More people are carefully selecting new properties whose construction has already been completed.
Ma Lin bought a unit at this delay-plagued condominium project in Zhengzhou.
Pre-sale housing was a popular choice for homebuyers since developers tend to discount the prices. But in 2022, the share of completed properties among all real estate sales by value is expected to exceed the previous year’s for the first time in seven years.
Local governments are encouraging developers to build new properties and then sell them after construction is completed. Not only do such arrangements prevent confusion due to unfinished construction, but local officials also benefit by selling the rights to use state-owned plots.
Local governments lose out on these land-use revenues when housing demand focuses on pre-owned properties. When Beijing auctioned off 18 plots in September, for example, most came with the condition that a certain percentage of housing units had to be sold after construction finished.
A move from pre-sale purchases to after-construction sales would increase funding costs for the developer by an estimated 20% to 30%. Private-sector developers would be at a disadvantage since they face much higher funding costs than state-owned enterprises.
During the Beijing bidding, only one private developer won any of the plots of land put up for sale.
Much like the tech sector, the real estate industry is widely populated by private companies. If state-owned enterprises grab a higher share of the industry, they could sap even more vitality from the economy.