2015-02-01

Local Governments Trying Everything to Rescue Real Estate Market

Local governments in China threw everything, including the kitchen sink, at the real estate market in January. Buying restrictions are gone, taxes are cut, subsidies are available and public housing funds are easier to tap than ever before. The result was the 0.21% increase reported by CREIS. The full court press comes as cities worry they are in the eye of a monster deflationary hurricane, with four distinct problems.

One is the collapse in real estate investment, which has fallen far below the growth in fixed asset investment. See: Where's the Recession? Real Estate Investment By Province, December 2014

Second is oversupply in third- and fourth-tier cities, much of it in the wrong place. Many cities with large housing inventory still lack housing at the low and middle end of the market. Some of these cities also have net population outflows.

Third is the financial risk. Land sales are used to repay government debt, while real estate sales back trust products. Kaisa may be an isolate example, or it may be the first sign of systematic financial risk, the first casualty as Pandora's Box opens.

Finally there are rising debts and falling revenues at the local level. Many governments may see cash flow slow to zero or even turn negative due to the lack of land sales in the second half of 2014. It takes a couple of quarters to settle land sales, so the slowdown in 2014 will hit hardest in Q1 and Q2 of 2015. Without positive cash flow, cities cannot fund their local projects and real estate development, which goes back to the first problem of a collapse in real estate investment......

iFeng: 楼市四大"暴风眼" 地方政府为"救市"火力全开

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