Trade-ins: Housing's latest hope in China

There was a time when "trade-in deals" referred to selling one's old home appliances or cars to buy new ones with subsidies. Now, it has become a buzz phrase in China's property industry.

Trade-in deals for homes represent an attempt to integrate transactions for new homes and pre-owned homes. Property industry experts see them as an innovative endeavor to digest home inventories and boost home transactions.

As of May 6, more than 50 cities, including Shanghai, had voiced support for trade-in deals for homes, according to data compiled by the China Index Academy.

Analysts and industry experts believe more cities will come up with their own trade-in policies to boost demand from potential homebuyers in the coming months.

The trade-in activities initiated by local governments are a response to the tone-setting meeting of the Political Bureau of the Communist Party of China Central Committee on April 30, which called for digesting housing inventories and optimizing new demand, said analysts Ren Yingxue and Zhang Renyuan in an S&P Global China Ratings report.

The trade-in initiative will help trim home inventories, open up transactions for new homes and pre-owned homes, and activate overall market activity. But the ultimate effect may vary according to the model, mechanism and scale of the actual measures, said the S&P report.

The initiative aims to shorten the replacement cycle of selling one home and then buying another home, reducing homebuyers' concerns about daring to buy a new home before selling their existing home during the house exchange process, said Shaun Brodie, head of research on the China market at Cushman &Wakefield, a global real estate services firm.

"By providing a one-stop service, the initiative can assist buyers in navigating various aspects of a residential real estate transaction, thus promoting the better circulation of pre-owned homes, increasing the sales activity in the pre-owned housing market, as well as finally driving sales activity in the new homes market."

On detailed methodologies, the S&P report categorized three major trade-in models: purchasing the old flat via a government-backed entity; offering subsidies or favorable conditions in home transactions; and real estate agencies giving priority to selling pre-owned homes.

Among the differentiated approaches, the ones that pose fewer requirements, introduced on a greater scale, will have a stronger effect, the report said.

Chen Zhixu, senior manager with CBRE China research, said she expects the trade-in initiatives to achieve multiple effects, like speeding up the destocking of commercial housing, improving the financial condition of real estate enterprises and accelerating the supply of affordable housing.

"The execution of the trade-in policies will require more affiliated policy support — and the factors of capital, profit, evaluation and pricing, and enterprises' willingness, should all be taken into consideration. After this (April 30) meeting, it is expected that more supportive policies will follow," said Chen.

"We expect the (trade-in) initiative will be first carried out in first- and second-tier cities; and lower-tier cities will likely follow suit once the market finds stability."

Chen Sheng, president of the China Real Estate Data Academy, said further observation is needed first before trade-in activities are accelerated.

Chen said the essence of trade-in deals is the exchange of old homes for new homes at some cost, where the value of the existing home becomes the main capital for the new purchase. Once the old homes are sold, transactions for new homes should be encouraged. Only then can destocking of market inventory be realized.

On May 10, Zhengzhou, capital of Henan province, announced property trade-in measures across the city, becoming the first city to have such a policy, said Yan Yuejin, director of Shanghai-based E-house China Research and Development Institution.