Event:
The State Council meeting held on July 21 pointed out that the active and steady implementation of urban village renovation in mega-cities is an important measure to improve people's livelihood, expand domestic demand, and promote high-quality urban development.
Interpretation:
This is quite interesting. Yesterday, the A-shares also surged by 2%, but this is not the first time this idea has been proposed. An important meeting in April this year proposed to actively and steadily promote the renovation of urban villages and the construction of "dual-use" public infrastructure in mega-cities.
Many people think that the transformation of inner-city villages is a major move to save the real estate market, believing that the spring of the real estate market has come again, but I think the probability is not high. Real estate is a pillar, but we don't need to rigidly apply history. The renovation of inner-city villages is a move, but it can't be considered a major one. This policy seems similar to the renovation of shantytowns, both involve demolishing old houses and building new ones, but I believe that the current leaders have enough self-awareness, and compared to the past, the current consumption power is almost zero. Compared to 2015, the average selling price of residences nationwide has already increased by 60%, and some hot spots have increased by five to ten times, so it is impossible to increase prices to get rid of inventory, because no one is buying, and the income is very low, which can't support residents to continue to increase their leverage. Moreover, this reform is only in major cities such as Beijing, Shanghai, Guangzhou, Shenzhen, Chengdu, and Hangzhou, so it is completely different from the massive shantytown renovation in the past, it is difficult to create a large amount of new demand (no newly born people, no expectation on income), and it cannot change the overall expectation of the real estate market.
Although the old path is no longer viable, it is still possible to improve life a bit. Therefore, I think this time it can be considered as an investment in the supply side of real estate and infrastructure. Activating the infrastructure in the real estate sector can not only revitalize the supplier relationships that owe each other, but also pull some upstream and downstream private enterprises to participate, driving demands including building materials, cement decoration, household appliances, etc. It can even use the massive labor demand in the real estate sector to drive a little bit of employment (after all, the statistical number of youth unemployment rate is 21%, the actual estimate is over 40%), it can't be said that it's not a good move. (Do you know, in China, only those who work less than one hour per week, have a strong desire to find a job, but are unemployed because no company wants them, are counted in the unemployment rate. In other words, as long as this person doesn't want to work, or a company gives an offer but they feel the treatment is too poor and ultimately don't go, they will not be counted in the unemployment rate. Therefore, the actual unemployment rate is much higher than the statistical figure.)
Moreover, this meeting did not mention money, then who will pay? That is to say, it is not certain whether the demolition will give the house owner money now, it may directly give housing tickets, right? Like my hometown Zhengzhou, corruption will only ruin the people (Housing tickets are similar to the past grain tickets, they can only be used to buy houses, and it is also known that the real price of the house traded is far above before, since after all, the prices of houses that can be bought with housing tickets will be "manually set" higher by those “bosses”) In this way, it will indeed alleviate some pressure of house stocking in some cities.
Another big highlight is that once the future renovation is completed, no matter what state it is, whether it is used for public rental housing supply or whatever, it reserves an imaginative space for asset securitization, enough for the officers to earn some pocket money. After all, a project with a continuous stream of rental income can be packaged into ABS and sold. In China, bank takes a large space in wealth management, and they have many ways to solve bad debts (usually rely on the "intentional" bad performance of financial products packaged in wealth management sector). Therefore, as a spectator, this can't be said to be a bad method, it's just hard for the masses to shoulder the losses. In addition, in the future, it can also bring some stable cash flow to local governments to replace the decreasing land sales income.
So this move not only activates infrastructure investment, but also drives the upstream and downstream employment that is languishing due to real estate, and by the way, it creates rent for local governments, as well as some new income from ABS packaging and selling. Therefore: the renovated new buildings, the government will take care of them for itself, then for the old houses in the city, they also "collects" them for you, it's just that maybe you need to "pay some extra fees" or decrease a bit your living standard. This plan, besides being strenuous, seems also to be feasible.
Another hidden benefit, is that it may slightly address the issue of private enterprises being in debt. This problem is not easy to solve, so it's necessary to find a solution quickly. The inner-city village renovation project, which is under the halo of the new era, is the most suitable. It will certainly bring income to some investors, bring orders to idle suppliers, and give “reputation” to those local governments that can no longer continue to deceive people with false promises. However, this policy may not be good news for the low-income urban population currently living in inner-city villages. Even if the living environment improves in the future, it cannot be enjoyed without an increase in income. Moreover, it is estimated that at least one-third of the original residents will leave, so there may be a situation similar to reverse urbanization.
But this is not a problem, after all, the birth rate is almost negative, and big cities do not rely on labor-intensive agriculture to survive, and the means of stimulating employment in the service industry are more flexible. So for big cities, there won't be much loss even if these people leave. But what we need to see is that historical problems are not so easy to fade, and historical legacy issues are not solved by creating new contradictions (Zelensky would definitely say: nonsense, I did a good job by creating contradictions to win over the army). New ideas can divert attention, but they are just expedient measures. What really needs to be solved is the problem of lack of confidence, that is, giving the people a stable expectation in their income is the truly meaningful long-term strategy.
Rough Prediction:
In the State Council meeting, it was stated, “The supply and demand relationship in the real estate market has undergone significant changes, and it is appropriate to adjust and optimize housing policies in time, implement strategies based on the specific situation in different cities, make good use of policy tools, better satisfy residents' rigid demands and improvement housing needs, and promote the stable and healthy development of the real estate market.”
The key term here must be "significant changes in the supply and demand relationship in the real estate market." It means that the situation of continuous price increases due to unmet demand as in the past will no longer occur.
As for whether the future real estate market will rise or fall, I believe there will be an excellent indicator, which is "expectation. In China, the expectation refers to the introduction of new policies. If everyone believes that such high-level meeting stated that the overall economic situation of real estate has changed dramatically, then there will definitely be a series of policies to promote real estate stabilization in the future.
This "expectation" is that: the real estate purchase control policy led by first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen will be changed “better”. Specifically, almost all cities in China, including first-tier cities, are expected to gradually revoke such real estate purchase restrictions. The critical point is to what extent this change will reach. If there is a complete revoke of restrictions, then the entire real estate market may stabilize or even warm up again, because this is the best thing that could be expected. However, if the restrictions are only partially lifted, such as in some first-tier cities where people (registered locally) are not allowed to buy multiple houses if they are not married, then such policies are just okay, it's not that bad either. If the housing restriction policy in first-tier cities does not change at all, then it means that the expectation has not been met, and this market will become even worse.
So to sum up in one sentence: The continuation of a sharp increase or even a slight increase in house prices is almost impossible, so don't do any speculation in housing price again. And whether the future expectations are good or not depends on the purchase restriction policies.
(An update on August 9, my hometown started to change (the first city to make such change in China): 1. changed the mortgage interest rate; 2. cancelled any restrictions on selling houses (previously only those who have been living there for 3 years would sell their house). Although there is no change in purchase side, but I believe such change is not strong enough to reverse the situation: There will be such revoke soon.)