During the rapid development phase of China's real estate market, many cities experienced "high inventory" conditions, caused by years of deviations from market supply and demand in commercial housing supply. To mitigate the risks high inventory poses to the real estate market and financial system, the Ministry of Housing and Urban-Rural Development set the tone in 2014 to "do everything possible to reduce inventory," followed by multiple policies introduced by central and local governments.
This study examines recent trends in urban housing inventory in China, assesses the effectiveness of inventory reduction policies, and assesses the progress of rational returns to urban housing supply in China. The preliminary research results were published in the late February 2023 issue of China Real Estate. The author is Li Yunhe, a policy analyst at the Urban Development and Land Policy Research Center of Peking University–Lincoln Institute.
Commercial residential inventory has two different definitions: "narrow inventory" and "broad inventory." The former refers to ready-to-move-in homes for sale, while the latter refers to the sum of ready-to-sell-ready homes and pre-sale properties. The article separately estimates the scale of "narrow inventory" and "broad inventory" in China's current real estate market. Since there is currently no direct statistical indicator data for broad residential inventory, this article estimates the broad inventory scale of commercial residential properties based on "historical cumulative indicators such as newly started construction area and sales area," "current period data on completed and sales area," and "pre-sale application and registration filing data from the Urban Housing Authority," in order to explore the current market operation and the rationality of inventory scale. Based on data analysis, the main conclusions are as follows:
(1) Narrow residential inventory has significantly decreased, delisting risks are controllable, and the market is moving in a rational direction. In 2021, the area of ready-to-move-in residential properties for sale was 230 million square meters, equivalent to 50% of the historical peak, effectively halving the inventory level. However, under the influence of multiple factors such as pandemic controls and market downturns, the inventory of ready-to-move-in commercial residential properties is entering a new upward cycle, but the inventory clearance cycle remains below the warning line (18 months), making the pressure to sell goods manageable. Among the ready-to-sell units, nearly 90% are "commercial housing for sale or vacant for 1-3 years," indicating the possibility of resale.
(2) Broad residential inventory levels are rebounding, and there is pressure to clear them; a rational return to market demand remains a long way off. In 2021, the estimated scale of broad inventory of commercial residential properties nationwide exceeded 3 billion square meters, showing a rebound trend, but there is still pressure to reduce broad inventory for commercial housing. By the end of 2021, without generating new supply, the national residential inventory scale could still meet sales demand for more than two years, and the road to returning the real estate market to supply-demand balance remains a long and arduous journey.
(3) Significant differences in urban residential inventory: "high inventory" in large cities may not be hard to solve, while "low inventory" in small cities faces pressure to clear inventory. Among the 53 sample cities, the average residential inventory scale in first- and second-tier cities in 2021 exceeded 8 million square meters, but these cities generally have relatively clear development prospects, large potential sales volumes, and relatively optimistic inventory clearance. The average inventory level in third- and fourth-tier cities is below 4 million square meters. However, as some cities contract and demand for homebuyers decreases, residential supply is more prone to backlog and unsold housing.
Against the backdrop of city-specific policies and the establishment of a long-term mechanism for supply-demand regulation in the housing market, increasing attention to real estate market inventory and dynamically adjusting the supply-demand relationship of commercial housing can promptly alleviate urban destocking pressure and avoid potential risks, becoming an effective strategy to achieve a rational return to the real estate market.
This article was published in the late February 2023 issue of China Real Estate.
Author: Li Yunhe, Peking University-Lincoln Institute Urban Development and Land Policy Research Center
