Destocking Is Over, But Local Govts Still Demolishing Housing

21st Century: 去库存告一段落 棚改货币化安置渐“退潮”

In recent days, rumors of the “change across the country, across the country, all suspended,” have aroused widespread concern. From the actual situation, 2018-2020 shed change target is 15 million sets, with an annual average of 5 million sets. Under this goal, the shed change project cannot be implemented across the board. Just in the context of declining real estate inventories and increasing pressure from local debt, relevant parties have made some adjustments to the shed change policy. In some places, the percentage of monetized resettlement has been changed in control sheds. In some places, the progress of shed reform projects has been slowed down, and banks have appropriately tightened loan approvals. Then, how will these changes affect the real estate market, macroeconomic operations, and monetary policy? This topic will be discussed.

Recently, the rumors of a "shed change, across the country, all suspended," are spreading. Affected by this rumor, real estate shares fell for two consecutive days.

Although the transformation of shantytowns is still proceeding drastically, there are various indications that the monetization of the past two years is gradually becoming “a retreat”.

In this year's government work report, there is no “monetary resettlement” for the expression of shanty towns. Local governments have long been aware of the changing direction of policy changes. Since the first half of the year, many local governments have clearly pointed out the trend of changes in the shed change policy from monetization to physical resettlement.

As an important part of affordable housing projects, it has taken several years to implement large-scale shantytowns in China. In recent years, the proportion of monetarization has continued to increase. The monetization of sheds is considered to be the main method of stock removal in third- and fourth-tier cities, but at the same time it has also been criticized as the promoter of rising house prices.

This is a broken windows policy. China has existing housing stock. It is demolishing it and paying the homeowners cash that can be used for the purchase of a new home. Undoubtedly some of that housing was low quality, and some of it likely was not. Or at least, if offered a low cash subsidy to simply stay in their current home, many people may have taken the cash. The government induced people to make a transaction they would otherwise not make. It is cash-for-clunkers on a grander scale. Also on a more permanent scale, since cash-for-clunkers accelerated car sales a few years, but shantytown renovation might have consumed 20 or more years of demand.

Some analysis pointed out that as the scale of inventories declines and the pressure on local debt increases, the monetarization and resettlement policies are being adjusted according to local conditions, and the gradual decline will be the general direction. However, this does not mean that the shed improvement process will slow down significantly. Considering the promotion of local economic growth, taxation, and urbanization, squatter settlements will gradually become more standardized.

The amount of cash going to home buyers soared into 2017.

Shack to monetize resettlement

In recent years, China's shed change has always maintained a larger scale. The target for 2015-2017 is 18 million sets, and it will be successfully completed. The target for 2018-2020 is 15 million sets.

As for the proportion of monetized resettlement, it was 9.0% in 2014, 29.9% in 2015, and rose to 48.5% in 2016. Although the official proportion has not yet been announced in 2017, from the perspective of local samples, I am afraid that it will only increase. The last year's monetization resettlement rate in Jiangsu Province was 52.83%. Many securities companies believe that the proportion of monetized resettlement in the country last year was about 60%.

As the large-scale shantytowns transformation will release a large number of housing purchases in the short term, monetization-based resettlement will increase their purchasing power. Therefore, the effect of destocking on commodity housing is very significant.

The government wasn't responsible for 60 percent of demand in 2017, but a huge chunk of housing demand in third- and fourth-tier cities came from this program. And now it's scaling back considerably as the central govt worries about local govt debt levels.

Developers were saved by the plan:

In a fourth-tier city in southern Shandong Province, local housing enterprises told the 21st Century Business Herald: “After the county started the shed change, the market suddenly emerged many buyers, and in the event that the regulation and control policies failed to follow-up, the result was "The new district has been sold out after years of selling old items, and some small developers nearing death have also been saved."

Because of this, the proportion of monetization in the third and fourth-tier cities is relatively high. In 2017, Jiangsu Province took a different approach to cities where the digestive cycle of commercial housing was within 15 months and beyond. The cities with long digesting cycles of commercial houses are more focused on monetization of sheds, and vice versa. Among them, the proportions of monetization resettlement for the three national hotspot cities in Nanjing, Suzhou, and Wuxi totaled 19.83%, compared with 62.24% in other cities.

Some organizations have estimated that in 2017 China's shed change plan will start 6 million sets. Even if the 50% resettlement ratio is neutral, it can achieve 255 million square meters of destocking.

If developers didn't make hay while the Sun was shining and reduce they're activities, they will be caught as the government tide goes out.

In the past year or two, the property market in the 3rd and 4th tiers has been extremely strong, and large-scale housing enterprises have generally achieved good sales performance in these regions. The mainstream view is that this is due to the severe control of hot and cold first- and second-tier cities, as well as the acceleration of the monetization of shanty-store reforms in third and fourth-tier cities. "The market has suddenly increased millions of home buyers who hold cash, and most urban credit policies are still relatively loose." Zhang Dawei, chief analyst of Centaline Property, said.

The monetization of sheds has also pushed up housing prices in third- and fourth-tier cities. A listed person in a Beijing housing company pointed out that the reasons for the rise in housing prices in the third and fourth tier cities are the rising demand for investment, loose credit policies, and the macro factors that brand housing companies are sinking into third and fourth tier cities. "But the large-scale monetization of shanty rehousing is still the primary driving force for the robust property prices in the third and fourth tiers," he said.

Prices are expected to fall as demand falls in third- and fourth-tier cities.

The three-and-four-tier property market will cool down

In fact, the policy signal has long since been released. In the government work report released during the “two sessions” this year, there was no “monetary resettlement”. In the government work report of the past two years, there was a clear reference to “promote the ratio of monetized resettlement”.

Local governments obviously also noticed this change. In April of this year, Anhui Province pointed out at the promotion meeting of the provincial township protection and housing project that all localities must reasonably control the proportion of sheds to monetization, and cities and counties with tight supply and demand of commodity housing should further reduce the proportion of monetized resettlement. In Huaibei City, it was emphasized at the summary meeting in mid-June that “the county and district governments must plan for the resettlement plots in advance in response to the change in the policy of shed change from monetized resettlement to physical resettlement in 2018...”

Analysts believe that regardless of market rumors whether there is a basis, the monetary resettlement policy has gradually weakened, and in the future may further ebb.

However, the renovation of squatter settlements will not in itself greatly slow down. The 21st Century Business Herald interview found that as a political task, most of the city’s shed reform tasks have not been reduced, and the enthusiasm for advancing shed change is high.

In June this year, in Shangrao City, Jiangxi Province, at a press conference, Shangrao City promoted the decommissioning of commodity housing through the transformation of shanty towns. In that year (2017), the period of decontamination of commodity housing fell from 24 months at the beginning of the year to 7 months, which promoted The healthy development of the real estate market; driving the development of related industries such as construction and real estate transactions, increased taxation, freed a large amount of land, and optimized the spatial layout of the city.

Yin Yuejin, director of the Think Tank Center at Shanghai Yiju Research Institute, said that the transformation of shantytowns to the local economy cannot be neglected. In this sense, the enthusiasm of the local government for shed change has not been extinguished. Judging from the existing policy actions, the future shed change will be gradually standardized to minimize the impact on house prices and local debt.

He believes that with the retreat of the shed to monetization resettlement, the third and fourth line of the property market is likely to cool down, the number of three-and-four-tier cities continue to lead the price increase for many months will be less and less. In the future, housing companies will be more cautious when entering these areas. This may even force some of them to return to the first and second-tier cities.

Demolishing old homes to soak up existing housing stock is still a favorite of local governments. Instead of getting cash for a home purchase, home owners whose home is demolished will be given a new home. The broken windows policy will continue.