China slowdown highlights potential pitfalls of property reforms

In Yanjiao, a town about 40km east of downtown Beijing, David Wu has found a novel way to deal with the Rmb13,000 ($2,048)-a-month mortgage he can no longer afford.

Instead of listing his three-bedroom apartment for rent or sale, the 32-year-old office worker, who makes Rmb7,000 a month, has offered to give it away to anyone willing to shoulder the cost.

Four years after Wu bought the apartment for Rmb3.9m and later leased it out for Rmb2,500 a month, the property is worth less than Rmb1.5m and rents have not budged.

“I thought I could make a fortune from the investment,” he said. “It ended up being a nightmare.”

Wu is one of many property owners in Yanjiao, once an investment hotspot thanks to its proximity to the capital, who were tripped up by the town’s decision in 2017 to adopt some of the nation’s toughest purchase restrictions to curb property speculation.

For Beijing’s economic policymakers, the danger is that Yanjiao’s past could be China’s near future. President Xi Jinping has successfully cooled many of the country’s hottest property markets as part of his campaign to deliver “common prosperity”. But real estate prices could fall further — and faster — than the government would like, depressing broader economic activity.

China on Monday reported that gross domestic product grew at its slowest pace in 18 months in the fourth quarter of last year, up 4 per cent compared with the 6.5 per cent rise achieved in the same period in 2020. Quarter-on-quarter growth improved to 1.6 per cent, compared with a revised 0.7 per cent in the July-to-September period, according to data from the National Bureau of Statistics.

“A lot of Chinese cities may follow Yanjiao [into a] housing recession thanks to a lack of demand,” said Dan Wang, chief economist at Hang Seng Bank China.

The story of Yanjiao’s rise and fall began a decade ago, when the township became a popular destination for Beijing house-hunters who could not afford a home. At the time, property prices in the capital were many multiples higher than in the town just across the border in Hebei province.

“Demand for housing took off in Yanjiao after Beijing [prices got] out of reach,” said Wang Chengdong, a local estate agent.

Between 2010 and 2020, Yanjiao’s population doubled to 630,000.

As migrants flooded into the once agricultural township, so did speculators. Yanjiao realtors said house-flipping had taken off by 2015 as Beijing relaxed credit controls to boost the economy.

New housing sales in Yanjiao, by floor space, increased 150 per cent from 2014 to 2016, according to E-House China, a Shanghai-based real estate consultancy. “Everyone thought the housing binge would last and the only direction for property prices was up,” said Wu.

In 2017, however, the Yanjiao government declared that only residents or migrant workers who had spent at least three years in the township could buy homes there.

Transactions fell about 80 per cent in both 2017 and 2018 before staging a moderate recovery. “The policy tightening reduced our clientele from people across the country to a much smaller group of Yanjiao natives, many of whom already own multiple homes,” said Wang Chengdong.

The property slump has put local government finances under stress. Sanhe, the city which administers Yanjiao, is expected to report an almost 50 per cent drop in land-sale revenues for 2021 following a 30 per cent decline in 2020, according to a recent government statement.

According to several people familiar with the government’s policy response, Yanjiao recently stopped enforcing the ban on purchases by out-of-town residents but has not publicly announced the decision. As a result, transactions and prices still fell towards the end of last year.

“The government hasn’t made too many people aware of the new rule for fear of triggering speculation,” said Wang Chengdong. “But how can you stimulate sales without making [the policy change] widely known?”

A Sanhe city official said the purchase restrictions had not changed.

As Yanjiao’s housing woes continues, a growing number of property investors are struggling with mortgages that far exceed the market value of their apartments. While some distressed homeowners, such as Wu, are offering their flats for free to anyone willing to take on the mortgage, others have had to default.

According to official data, foreclosures in Yanjiao surged from 150 in 2019 to 823 last year. A local bankruptcy court judge, who asked not to be named, said he was struggling to keep up with the resulting workload.

“I have stopped giving free tours of the foreclosed houses,” the judge said. “There are too many of them.”

Additional reporting by Maiqi Ding in Beijing

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