Summary of Key Points
On August 28th, three departments, including the Ministry of Housing and Urban-Rural Development, jointly issued a policy to promote the sale of completed residential properties. The core of this policy is to change the current system where homebuyers have to pay first and then receive the property, to one where they can see what they are getting before making a purchase. This policy was introduced in light of the bankruptcy and liquidation of Evergrande, which marked the end of the old real estate development model characterized by high debt, high leverage, and rapid turnover. Additionally, the current reversal in the supply and demand dynamics of the real estate market (with more transactions of second-hand homes than new homes) has made the old pre-sale system unsuitable for high-quality development. The new policy includes measures such as extended development loans, regulation of earnest money, and a designated bank system to protect the rights of homebuyers and help real estate companies transition smoothly. In the short term, this may lead to a temporary decrease in new home supply, but in the long run, it is expected to stabilize housing prices and shift the industry towards quality competition.
Why Promote the Sale of Completed Homes Now?
The old model is no longer viable due to the significant risks it poses. Real estate companies relied on a "three highs" strategy—high debt for financing, high leverage to acquire land, and rapid turnover to sell homes—but the bankruptcy of Evergrande exposed the fatal flaws of this approach. Much of the funds were used for land acquisition and expansion rather than for building houses, resulting in unfinished projects that deceived many homebuyers. Moreover, the market has changed; more people now value the actual quality of homes over the promise of future developments. The national 14th Five-Year Plan also calls for the establishment of a new real estate model, so this policy is in line with these developments. It not only addresses the main concern of homebuyers regarding unfinished projects but also forces real estate companies to abandon aggressive expansion and pursue higher quality.
For Homebuyers:
Homebuyers no longer have to rely on uncertain prospects. The benefits of the new policy are clear:
1. What you see is what you get: Homes are sold only after they are completed, allowing buyers to see the layout, lighting, landscaping, and even decoration details firsthand, eliminating the need to rely on renderings.
2. Almost zero risk of unfinished projects: Homes are already built, so there is no risk of the company running out of funds and stopping construction.
3. Property certificates issued immediately: Certificates are issued at the time of delivery, avoiding delays.
4. Safeguarded earnest money: Even if earnest money is paid, it is regulated, preventing companies from misappropriating it and disappearing.
For Real Estate Companies:
The new policy poses significant challenges to their financial and operational capabilities, but there are also support measures:
Challenges:
- Extended payment cycles: It now takes 2.5 to 3 years for completed homes to be sold, compared to the previous 6 months for pre-sale homes, slowing down cash flow.
- Higher financial requirements: Companies must use their own funds or loans to build homes, which can be challenging for smaller firms.
Support Measures:
- Extended development loans: Loans for completed homes can be up to 7 years, compared to 5 years for pre-sale projects, providing more time to repay debts.
- Earnest money regulation: Companies can collect a small amount of earnest money after obtaining the construction permit, providing immediate financial support.
- Designated bank system: A single bank is responsible for both lending and monitoring, ensuring more stable funding.
- Land with planned development: Land is sold with a prepared development plan, reducing preparation time and accelerating construction.
Short-Term and Long-Term Market Impacts:
Short-term impacts:
- Possible reduction in new home supply: Real estate companies will be more cautious in acquiring land, and building completed homes takes time, so new home supply may decrease in some cities in the next 1-2 years.
- Homebuyer sentiment: The safety of completed homes is likely to boost buyer confidence, especially among those in urgent need of a home.
Long-term impacts:
- Stabilized housing prices: Reduced supply and improved quality will lead to a more balanced market, preventing drastic price fluctuations.
- More active secondary housing market: With the competition between new and second-hand homes becoming fairer, the secondary housing market will become more active.
- Industry differentiation: Smaller companies with weaker financial strength may be eliminated, while larger ones will focus on improving product quality (e.g., better layouts and amenities).
The Future of the Industry:
The industry is moving away from a focus on scale to one where quality is king. Real estate companies will be judged based on their ability to deliver homes on time and with high quality. The new policy forces them to invest in product development rather than aggressive expansion. In the long run, this will result in more reliable and quality homes for buyers, as the ultimate goal of home purchasing is to live well.
In summary, the policy to promote the sale of completed homes represents a shift in the real estate industry from rapid, high-risk growth to stable, quality-driven development. Although there may be short-term difficulties, it will ultimately benefit everyone involved.