Summary of Key Points
Recently, six ministries and commissions jointly introduced an “epic” set of housing policies (reducing down payments, lowering interest rates, providing tax exemptions, and allocating funds for affordable housing), yet the market response has been lukewarm. Residents are not only unwilling to take on more debt to buy homes but are also actively reducing loans and increasing their savings. Housing prices continue to fall in most cities across the country, with only a few core cities experiencing partial recovery. The housing industry is witnessing a “Matthew effect” where the stronger companies become even stronger, leaving smaller and medium-sized firms struggling to obtain financial support. Although the policies seem substantial, they lack the crucial element of “consumer demand,” resulting in a disconnect between the policy measures and market conditions, meaning that a “policy bottom” does not equate to a “market bottom.”
Detailed Analysis
1. Why aren’t these epic policies effective? The missing key factor: demand
The six ministries’ policies cover various aspects, including credit (reducing down payments to 15% and interest rates to 3.05%), tax incentives (exemptions for VAT on properties held for more than two years and continued personal income tax refunds), assistance for housing companies, and affordable housing programs. The intensity of these measures is comparable to those in 2008 and 2015, but the outcomes are far from satisfactory:
- 2008: After the release of 4 trillion yuan in stimulus funds, residents believed that housing prices would rise, and the relaxation of credit policies led to an increase in borrowing and demand.
- 2015: Housing renovation programs provided direct compensation to residents, creating a purchasing demand from nearly 30 million households affected by demolitions.
- 2026: Although the policy measures have been implemented, residents are not responding positively. In the first half of the year, household loans decreased by 366.8 billion yuan (the first time in nearly 20 years), while savings increased by 7.58 trillion yuan. The breakdown in the demand chain lies with the residents themselves.
2. Houses have become “durable consumer goods”; who would borrow to buy something that depreciates?
This year, the State Council classified housing as a “major durable consumer good” (alongside cars and household appliances), officially acknowledging that it is no longer an investment that appreciates in value but rather a commodity that loses value over time. However, the policies still encourage borrowing:
- In the past, people borrowed to buy homes with the expectation of price increases, hoping to profit from the appreciation.
- Now, houses are treated more like regular consumer goods; buying them with a loan means taking on a risk of loss. For example, a 3-million-yuan house might cost 150,000 yuan less in down payment, but its value could drop to 2.7 million yuan the following year, meaning the savings would not cover the potential loss.
- Even for those with urgent housing needs, 34% prefer to pay in full, and those looking to upgrade their homes are even less inclined to do so, as no one wants to carry a loan for a depreciating asset.
3. Price increases in core cities are a “local illusion”; most cities are still experiencing declines
In the June data on housing prices in 70 cities, 20 cities saw gains (mainly in the top-tier areas), while 50 cities experienced declines, with Beijing seeing a decrease of 0.3%. The recovery in core cities only affects 5% of the national population, and the transaction volume of new homes in 100 cities nationwide decreased by 12%.
- In 2008/2015, policies had a broader impact because residents were willing to take on more debt, leading to price increases that spread from core areas to smaller cities.
- Now, this transmission mechanism is broken: only the wealthy and tech-driven populations in core cities (such as Hangzhou’s Binjiang district, where 60% of buyers are tech workers) are driving demand, while in most cities, there is a surplus of unsold properties (763 million square meters, the fifth-highest level in nearly 40 years), with a sales backlog of 24 months. The activity in core cities feels like a world apart from what most people experience.
4. Residents are actively reducing their debt; policies that encourage borrowing are ineffective
The central bank has acknowledged for the first time that residents are voluntarily reducing their debt levels. The leverage ratio has dropped from 62.3% to 59%, and the growth rate of mortgage loans has been negative for twelve consecutive quarters, with debt growth also hitting a record low since 1995.
- Banks are cautious about mortgage risks; corporate loan rates (3.0%) are lower than mortgage rates (3.1%), so they prefer to lend to businesses rather than individuals.
- Residents are calculating the costs carefully: Lower interest rates are not a benefit but a sign that banks are struggling to sell loans (similar to stores offering discounts due to lack of demand). In 2008, when interest rates were 4.16%, loan growth was high; now, with rates at 3.05%, no one is borrowing.
5. The housing industry shows a “Matthew effect,” with only the strongest firms thriving
The policies aim to support all companies and stabilize the market (expanding the list of eligible firms for relief and providing funds for project completion), but in reality, only the largest firms are benefiting. In the first half of the year, the top 20 housing companies accounted for 90.8% of sales, while the remaining 30 firms received less than 10%.
- Banks are hesitant to lend to smaller firms, fearing that their collateral (land and properties) might depreciate. They prefer to provide relief funds to state-owned enterprises or leading private companies.
- The Matthew effect is intensifying: Land in Shenzhen’s Nanshan district sold for a 150% premium, and land prices in Hangzhou set new records, while the national land auction failure rate exceeded 40%. Funds are flowing mainly to core cities and large firms, leaving smaller players with no choice but to continue liquidating their assets.
Conclusion
The policies provide opportunities to enter the housing market, but residents are actively stepping back from debt. Without sufficient demand, even the most ambitious measures will be ineffective. When will the market bottom out? It will only happen when residents are willing to take on debt again. For now, they prefer to repair their finances rather than burden themselves with loans.