China is trying to reduce a glut of apartments by offering more incentives to rural households to encourage them to buy homes in urban areas like Meishan. Photo: Zhang Kechun for The Wall Street Journal
Esther Fung
Updated March 1, 2016 12:25 p.m. ET

MEISHAN, China—On a recent Sunday, three generations of the Wei family strolled out of the sales room of one of the many partially finished apartment towers in this small city in southwest China, one of them clutching a contract.

Sixty-year-old Wei Ziyi said her daughter’s family, which now lives in the countryside, had just bought a three-bedroom apartment in the building that had two life-size replicas of jet fighters and cannons with camouflage tarps outside the showroom to attract interest.

“It looks really comfortable,” said Ms. Wei, referring to the partially-built project that featured stone pathways, manicured gardens and water fountains.

The family also took advantage of a new local government program that shaved roughly 50,000 yuan ($7,640) off the price of the 420,000 yuan home. “The subsidies definitely helped,” Ms. Wei said.

Score one for the government’s effort to resolve China’s potentially crippling housing glut partly by encouraging rural dwellers to buy urban homes. In recent months, local governments in more than 100 cities have accelerated efforts to do this by loosening measures such as tax cuts, widened quotas for government-subsidized housing loans and cash subsidies.

The Property Report

These and other measures are targeting an oversupply of homes—apart from the top-tier cities such as Beijing, Shanghai and Shenzhen—that has been a drag on the world’s second-largest economy. While housing sales rose 6.9% by volume in 2015, China’s inventory of completed homes reached an all-time high at 452.5 million square meters (4.9 billion square feet) as of the end of 2015, up 11.2% from 2014. This doesn’t include numerous homes currently under construction.

The overbuilding has weakened investment appetite and led to a fall in housing starts for a second straight year. Related industries such as steel, furniture, transport and machinery are also facing dwindling prospects.

Analysts and housing officials estimate that it would take around two years to digest supply in hundreds of smaller cities, with the most severe cases of overbuilding in China’s northeast rust belt.

In November, President Xi Jinping told a meeting of officials that China must resolve the housing inventory situation and ensure the health of the property sector.

Since then, Meishan, a city of 3.5 million people, has become a showcase for efforts to lure rural dwellers to cities to buy homes as part of so-called destocking efforts to reduce the glut. Last month, scores of officials from the housing ministry and local governments gathered here to celebrate that sales volume grew 16.8% last year. The overbuilding in China has weakened investment appetite and led to a decline in housing starts for a second straight year. A building in Yulong Peninsula in Meishan Photo: Zhang Kechun for The Wall Street Journal

But some cities haven’t had the same success as Meishan, and some analysts and local government officials warn the rural strategy isn’t a cure-all. Banks typically hesitate to extend mortgages to rural migrants, whose homestead land doesn’t typically qualify as collateral.

“Now with bad loans growing in China, banks are reluctant to lend to farmers. Farmers don’t have assets and lending to them is risky,” said Wang Fei, an official at Hubei Province’s department of housing and urban-rural development.

It also isn’t clear how many rural residents want to move to cities. “Some of them are not willing to because they just cannot get used to the city life and would rather stay in the rural areas for better air quality,” Mr. Wang said.

Still, Meishan gives other cities suffering from thousands of empty homes a road map for attracting more rural buyers. Before the new measures were put in place its housing market was hurting, with prices of new homes in Meishan falling 4.1% from 2013 to 2015. Nationwide, home prices rose 11% over the same period, according to data provider China Real Estate Information Corp.

Housing inventory in the city rose to 22.5 months last April, an alarmingly high level compared with a healthier rate of 12 months or lower. There were also cases where cash-strapped property firms defaulted on their loans, leaving behind unfinished apartments.

Buyers of Purple Cloud Golden World housing project are now stranded after Yang Jinhao, who controlled Sichuan Xinrui Property Development, got involved in a dispute with a shadow lender early last year.

“China has blindly constructed so many homes and wasted so much resources. I can’t stand it!” said Yu Jianmin, a 70-year-old caretaker of the stalled project who said the construction firm he works for is still awaiting payment from Mr. Yang. Mr. Yang couldn’t be reached.

Stuck with insufficient demand and the prospect of abandoned projects, Meishan’s authorities quickly launched a pilot subsidy program last May to attract rural dwellers to buy homes in the city. Property developers put up 200-300 yuan and the local government topped it up with another 200 yuan to make up the 400-500 yuan per square meter subsidy that lasted until December. This program was recently extended to the end of March.

While this translates to an overall discount of around 10% per home, developers said the cash subsidy directly lowers the burden of a 30% down payment requirement for rural customers, who generally aren’t as well-off as urban dwellers. Housing inventory fell to 11 months by the end of 2015.

Sunshine Estate, one of the top property developers in the city, said it had been struggling with weak demand since 2014 until early 2015, but sales picked up following the subsidies. It sold 1,934 housing units in the seven months from May to December, up 41.3% from the same period a year earlier. Rural migrants made up four out of five of these sales. Property sales manager Deng Jian, right, said recent moves to extend and raise a housing subsidy are driving expectations that bigger subsidies might be in store later. Photo: Zhang Kechun for The Wall Street Journal

“In this current property market, if you solely rely on city residents to buy homes, revenue outlook will not be optimistic,” said Sunshine Estate Chairman Deng Ningwei. “Smaller firms face bigger pressure. If sales don’t improve and their cash flow is cut off, there would be serious consequences.”

But designing effective subsidies is tricky. The recent moves to extend the validity period of the subsidy until the end of March from the end off December and raising the subsidy to 500 yuan from 400 yuan per square meter are driving expectations that bigger subsidies might be in store later, said Deng Jian, a sales manager for another housing project called Elegantly Riverside.

“Customers are becoming wary and think that the authorities aren’t trustworthy,” said Mr. Deng, adding that demand from rural migrants in the city might peak soon.

Some governments have yet to fully secure long-term land rights for farmers. The seemingly unshakable feeling that rural Chinese are second-class citizens can also hinder them from seeking full integration in the city.

“I don’t want to buy a home in the city. What if I can’t keep my job? With my own farmland at least I can still feed myself,” said an odd-jobs laborer in Meishan who would only give her surname, Zhang. “If you are poor, (urban) people will laugh at you. If you don’t have a job they will think you are lazy.”

—Pei Li contributed to this article.

Corrections & Amplifications:
China’s inventory of completed homes reached an all-time high at 452.5 million square meters, or 4.9 billion square feet, as of the end of 2015. An earlier version of this article misstated the converted figure as 4.9 million square feet. (March 3)
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