China's new property presale rules risk prolonging sector downturn

More than two decades after China's central bank recommended that developers be forbidden from selling flats before they are completed, the government has called time on the presale financing model that contributed to the excesses of the property boom and shattered homebuyers' confidence in the market. On August 28, Beijing announced a package of measures designed to rebuild trust in the completion and handover of pre-sold homes, stimulate demand and put the country's ailing residential market on a firmer financial footing. HSBC said 'policy alignment' among regulatory bodies and government ministries suggested the policies were 'a concerted step towards a new and healthier long-term housing market model'. The most important measure was the reform of housing finance . A notice jointly issued by housing and financial regulators raised the threshold for presales to topping out the main structure of the building. It also stipulated that mortgage proceeds would be deposited into supervised escrow accounts that will not be available for use until the project is completed. In a report on August 29, Nomura said 'deferring the release of funding after home completion effectively dismantles the financing function of presales'. Standard Chartered said in a report on August 31 that 'the new rules emphasise project-based financing, shifting away from developer-based credit'. At a time when global investors barely give China's economic data a second look, it is important to recognise that Beijing is addressing one of the underlying causes of the housing bust. At the peak of the boom in 2020-21, presales accounted for nearly 90 per cent of residential floor space sales. Over-reliance on presales contributed to excessive leverage and amplified the liquidity crisis in response to the government's imposition of limits on borrowing by developers, known as the ' three red lines '. By prioritising the sale of completed homes, Beijing is putting the interests of homebuyers first. As S&P Global Ratings noted in a report on September 1, 'developers will be more responsible for their own financing instead of shifting the investment burdens to homebuyers through presales'. The reforms could mark a turning point for domestic demand in China . S&P went on to say that 'authorities are attempting to strengthen the trust of homebuyers, a key ingredient to improve consumption growth'.