China has a plan for its housing crisis. Here's why that's not enough.

China has a housing problem. A very big one. It has nearly four million apartments that no one wants to buy, a combined area of ​​unwanted living space roughly equivalent to the Philadelphia area.

Xi Jinping, the country's leader, and his deputies have called on the government to buy them.

The plan, announced last week, is Beijing's boldest step yet to end the housing crisis that threatens one of the world's largest economies. It wasn't enough either.

China has a bigger problem hiding behind all those empty apartments: even more houses that developers have already sold but haven't finished building. A conservative estimate puts this figure at around 10 million apartments.

The scale of China's real estate boom was breathtaking. The extent of its relentless recession, which began nearly four years ago, remains vast and unclear.

China's leaders were already managing a slowdown after three decades of double-digit growth before the housing crisis sparked a slowdown beyond their control. Few experts believe Beijing can transition to more sustainable growth without confronting all those empty apartments and the developers who have gone to excessive lengths to build them. In total, trillions of dollars are owed to builders, painters, real estate agents, small businesses and banks across the country.

After decades of promoting the biggest real estate boom the world has ever seen and allowing it to account for nearly a third of China's economic growth, Beijing suddenly intervened in 2020 to cut off the easy money that fueled expansion, setting off a chain of bankruptcies that shocked a nation of home buyers.

It was the first test of Beijing's resolve to wean China's economy from its decades-long reliance on building and construction to prop up the economy.

The government now faces a new test of resolve. To end the excesses of the past, it has signaled in recent years that no real estate company is too big to fail. But as dozens of major real estate developers went bankrupt, they destroyed any remaining confidence in the real estate market. Since then, the authorities have tried everything to restore the optimism of buyers. Nothing worked.

With few buyers, the developers still standing are also on the verge of default. And they are closely linked to local banks and the financial system that supports the government in every village, town and city. A recent estimate from research firm Rhodium Group puts total domestic real estate sector borrowing, including loans and bonds, at more than $10 trillion, of which only a tiny fraction has been recognized.

Right now, not being able to sell a house seems like a risk, but it's not. More developers are going bankrupt, said Dan Wang, chief economist at Hang Seng Bank. The first major developers to default, like China Evergrande, had problems hiding in plain sight.

Evergrande's initial default in December 2021 sparked fears of a Lehman moment in China, a reference to the collapse of Lehman Brothers in 2008, which triggered a global financial crisis. The fallout, however, was managed carefully and discreetly thanks to political support that allowed Evergrande to complete the construction of many apartments. By the time a judge ordered the company liquidated five months ago, Evergrande had effectively ceased to be a viable business.

But China has tens of thousands of small developers across the country. The only way for authorities to stop the market's freefall, Ms. Wang said, is to bail out some mid-sized developers in cities where the crisis is more acute.

China's top leaders are instead refocusing their attention on the millions of apartments that no one wants to buy, pledging to transform them into social housing with lower rents. They committed $41.5 billion to help fund loans for public companies to begin purchasing unwanted properties totaling eight billion square feet, of which just over four billion square feet are apartments unsold. according to at the National Bureau of Statistics.

When Beijing's response was announced last week, developers' shares initially rebounded. But some critics say this initiative came too late. And most thought it would require a lot more money. Estimates ranged from $280 billion to $560 billion.

Officials in Beijing began softening their approach last year. They ordered banks to provide loans and other financing to dozens of real estate companies they deemed good enough to be placed on a government whitelist.

This support was not enough to prevent the fall in property prices.

Political decision-makers have activated other levers. They made the biggest reduction ever on mortgage rates. They tried pilot programs to get residents to trade in their old apartments and buy new ones. They even offered cheap loans to some cities to test the idea of ​​buying back unsold apartments.

In total, local authorities have tested more than 300 measures to increase sales and support real estate companies, according to Caixin, a Chinese business news media.

Yet the number of unsold homes continued to reach new levels. New housing prices continued to fall. So in late April, Mr. Xi and his 23 top decision-makers began discussing the idea of ​​taking some of these unwanted apartments off the market in a program reminiscent of the Troubled Asset Relief Program , which the American government put in place immediately. of the crash of the American real estate market.

Last week, China's top economic official, Vice Premier He Lifeng, convened an online meeting of officials from across the country and announced the news: It was time to start buying apartments. Soon after, the central bank eased rules on mortgage lending and promised to release billions of dollars to help state-owned companies buy apartments.

This decision underlines the extent to which the government is concerned about the dysfunctions of the real estate market.

Yet almost as soon as state media reported that Mr. He had called on local governments to buy up unsold apartments, economists began asking questions.

Should local governments buy back all unsold apartments? What if, in turn, they couldn't find buyers? And there was a price to pay: Economists estimated that such a program would need to be in the hundreds of billions of dollars, not tens of billions.

More worryingly, for some, the central bank had already quietly launched an apartment buyout program in eight hard-hit cities, committing $14 billion in cheap loans, of which only $280 million had been used. These governments did not seem interested in using loans for the same reason that consumers did not want to buy houses in small towns.

A big difference now, said John Lam, head of China real estate research at UBS, the Swiss bank, is political will. The country's most powerful leaders have said they support a buyout plan. This will put political pressure on those responsible to act.

The local government can acquire the apartments at a loss, Lam said.

Yet in places where populations are declining, which are some of the same cities and towns where developers have expanded more aggressively, there will be little need for public housing projects.

The optimistic view is that Beijing has more planned.

Beijing is on track to end the epic housing crisis, Ting Lu, chief China economist at Japanese bank Nomura, wrote in an email to clients.

The task, he added, is arduous and requires more patience while awaiting more drastic measures.