Why China won’t ban housing presales outright

Late August marked something of a watershed moment for China’s embattled property sector, now in its sixth year of decline. It began with Chinese courts kicking off proceedings to liquidate the onshore business of China Evergrande Group – the collapsed property giant that came to epitomise China’s property debt bubble – and sentencing its founder Hui Ka-yan to life imprisonment over financial crimes.

An unusually coordinated series of official announcements followed in days. The central bank, housing ministry and financial regulators each issued new rules governing how future property development would be financed.

The choreography around these actions sent a message of its own: out with the old and in with the new. Beijing was moving to close the chapter on the property sector’s leverage-driven financing model while laying the groundwork for a healthier replacement, described by regulators as the “new property development model”.

High on regulators’ chopping block were housing presales – the long-standing practice, now widely reviled by homebuyers, of paying for flats years before they are actually built.

For China’s many property developers, the presale system offered an extraordinary source of cheap, upfront financing. Combined with years of lax restrictions on the use of those funds, it helped propel developers’ breakneck expansion – and ultimately fed into the sector’s financial reckoning.

Closing financial loopholes was exactly what the latest policy salvo set out to do. Regulators promised tighter oversight of presale funds and, more importantly, to deny developers access to homebuyers’ mortgage money until project delivery. These provisions are aimed directly at the misuse of presale funds that has left projects unfinished and fuelled public anger in recent years, creating a source of financial instability and social risk Beijing clearly wants eliminated at the root.