In Depth: China Shifts Toward Completed Home Sales to Curb Risks

China is gradually shifting from a decades-old housing presale system to a model emphasizing the sale of completed homes in response to a persistent real estate slump. This transition aims to address key issues in the presale model, most notably the misappropriation of presale funds—which were often diverted from construction to land acquisition due to lax supervision—leading to liquidity crises and a mounting number of unfinished housing projects. The 2021 housing market crash exposed these systemic flaws, forcing regulators to reconsider the system.[para. 1][para. 2][para. 3]

Evidence of this shift is clear in recent data: in the first four months of this year, nearly a third of new homes sold by floor space were completed units, up from 10.4% in 2021. More than 30 mainland Chinese cities have adopted the completed home sales system since the end of 2022. The Ministry of Housing and Urban-Rural Development, responding to the ongoing market slump, has encouraged regions to move toward completed sales while tightening supervision for those retaining the presale approach.[para. 4][para. 11][para. 13][para. 18]

Historically, the presale system, introduced in 1994 and modeled after Hong Kong, helped developers overcome capital constraints and supported rapid housing expansion amid a shortage. Presale revenue became the industry’s financial backbone, with laws requiring that such funds be used solely for relevant project construction and kept in supervised accounts to prevent misuse. However, enforcement was often weak, and during market highs, presale funds were diverted for land acquisition, amplifying financial risks when the market soured. This resulted in cash shortfalls, delayed construction, and suspended projects, particularly pronounced after the 2021 downturn.[para. 7][para. 8][para. 9][para. 10]

The completed home sales system requires homes to be built to regulatory standards before sale. Its adoption has already led to a significant increase in the proportion of completed homes sold. Market insiders believe the shift could boost buyer confidence, curb fund misappropriation, and protect homebuyer interests by offering immediate occupancy and reducing the risks associated with delayed delivery and price drops.[para. 12][para. 13][para. 15][para. 16]

Despite its benefits, the new approach poses serious challenges for financially strained developers. Transitioning to sales of completed homes lengthens the period from land acquisition to sales, delaying developers’ main source of revenue and escalating financing costs. For example, top firms could face 40–50 million yuan ($5.55–$6.94 million) in added interest per extra year on a 1 billion yuan ($138.9 million) development loan at 4–5% interest. These pressures could push overleveraged developers towards insolvency and trigger a decline in local governments’ fiscal revenue from land sales, as developers dial back future land purchases.[para. 17][para. 21][para. 25]

Insiders largely agree that the completed sales model and presale system should coexist during this transition, with policies tailored to local market conditions. Regulatory and financing frameworks must evolve, with loan terms extended to bridge the timing gap between project completion and sales revenue. The completed model may first be piloted in lower-tier cities with high inventories and lower land costs to reduce cash flow stress, while caution is urged against an aggressive nationwide rollout in the current uncertain market climate.[para. 26][para. 27][para. 28][para. 31][para. 33]