Chinese Real Estate Developer Resorts To Desperate Shell Game To 'Sell' New Homes
China's real estate industry is struggling, but a recent occurrence in the city of Zhengzhou speaks volumes about how dreadful things have gotten. The Zhengzhou Real Estate Development Company has offered to buy 500 homes from Zhengzhou residents on the condition that they use the proceeds to buy a new home built by the developer.
The new home must also equal or exceed the price the developer paid for the home. If trying to understand how any real estate developer can make a profit from a shell game like this makes your head hurt, you are not alone.
Adding another level of complexity to this story is the fact that Zhengzhou Real Estate Development Company is state-owned. Accordingly, the local city government has asked residents to go along with the plan. The motive behind this unorthodox gambit by the developer is simple: Zhengzhou's real estate market is in free fall. China's National Bureau of Statistics says new home prices have dropped in Zhengzhou for 12 consecutive months.
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Medium-sized cities like Zhengzhou have been hit hard by China's real estate crisis, which is rooted in some of the same causes that led to the great financial collapse of 2008. Years of easy lending standards allowed China's developers to over-leverage, and the more they borrowed, the more they built. That led to an oversupply of housing while developers brought even more new units online.
A string of failures and corruption scandals hit some of China's most well-known real estate developers. In response, the Central Government severely tightened lending standards. That created a liquidity crisis for developers and denied them access to capital at a time when slow sales were making it necessary to refinance their debt. The Central Government empowered local authorities with near-total autonomy to relieve the crisis.
City governments have eased lending requirements, offered subsidies to help fund home purchases and lowered interest rates. However, those measures have not generated noticeable turnarounds for the real estate industry. There seems to be an understanding among prospective buyers that the steps being taken by local governments don't amount to a cohesive strategy for stimulating the real estate industry. In response, they are staying out of the market.
Industry observers doubt these new schemes will be enough to rescue China's housing market. Lynn Song, chief economist of Greater China at ING, said, “As the bottom has yet to be confirmed, we expect property to remain a major drag on growth this year. Policies to stabilize the market will likely still be needed in the months ahead.”
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This article Chinese Real Estate Developer Resorts To Desperate Shell Game To 'Sell' New Homes originally appeared on Benzinga.com
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