The property pre-sales model is no longer appropriate in China’s current real estate market, where a tight financing environment has meant that many housing projects are going uncompleted, leaving early buyers furious and refusing to make mortgage repayments, experts said.
The pre-sales model was introduced when there was a lack of properties on the market, Kuang Weida, director of the Center for Urban and Real Estate Research at Renmin University of China, told Yicai Global. Worried that prices would keep rising, buyers were willing to take the risk of purchasing the homes before they were finished.
But this model is no longer suitable for smaller third and fourth-tier cities that have a glut of properties for sale, Kuang said. Instead, these cities should experiment with only retailing finished houses.
After 20 years of rapid development, the Chinese real estate market has changed from a housing market with an increasing number of buyers to a housing market with an existing pool of buyers, Wang Yeqiang, researcher at the Institute of Urban Development and Environment under the Chinese Academy of Social Sciences, told Yicai Global.
Home buyers are now paying more attention to the quality of the houses, so pre-sales should gradually be discontinued, Wang said.
Pre-sales are still an important way of financing real estate projects, said Cui Guangcan, professor at Shanghai Normal University’s School of Finance and Business. They cannot be done away with until a new financing model is introduced.
Banks are meant to monitor the payments made for pre-sold houses to real estate companies, but in practice, they cannot keep track of how all the money is used, so should the developer encounter financial difficulties, there is still no guarantee that the project will be completed, Cui said.
The government should improve supervision of pre-sales downpayments as well as of the loans made to developers and the mortgages extended to home buyers to ensure that these funds are going towards finishing the housing project, Wang said.
There should be differentiated regulations based on real estate firms’ credit ratings, he added. Banks should hold onto a smaller proportion of pre-sales funds for those developers with good ratings to help them finish the project smoothly.