On February 2nd, Shanghai made a significant announcement: the government will begin purchasing second-hand homes for use as public rental housing. This news prompted many to ask whether Shanghai's housing prices have bottomed out and are set to rebound. I responded clearly that while this policy may help stabilize prices in the short term, over the long run, if the economy does not improve and rents do not rise, housing prices have not yet reached a true turning point for recovery.

Nevertheless, the policy is substantial. While there have been previous reports of government purchases of new homes, buying second-hand properties is far more complex. Acquiring new homes involves straightforward negotiations with developers, making it easier to agree on prices. In contrast, purchasing second-hand homes requires dealing with individual homeowners, which can lead to complications such as stubborn sellers unwilling to lower their prices. Additionally, variations in orientation, renovation quality, and floor level mean that even units of the same layout in the same complex can have different actual values, making valuation difficult.

So why would the Shanghai government undertake such a challenging task? The core reason lies in the rental yield. Many older, smaller properties in downtown Shanghai have seen significant price declines, making their rental returns relatively attractive—some now offer yields around 2.5%, with a few even reaching 3%. While this may not be particularly appealing to individual investors, it is considered high for the government, given its large capital base and emphasis on safety. Compared to low-risk financial products like 10-year government bonds, a yield of 2.5% to 3% is quite favorable. Moreover, the government's financing costs are much lower than those of ordinary investors—potentially below 2%, compared to around 3% for large-scale private borrowing. This creates a potential arbitrage opportunity that is virtually risk-free.

Recent data shows that Shanghai’s housing prices increased month-over-month in the past month. This is notable, as since the downturn began in 2023, there have been few months with positive growth. In the latter half of last year, Shanghai experienced a rapid decline in prices, making the recent stabilization and slight recovery somewhat unexpected. This optimism also contributed to a brief rally in real estate stocks earlier this year. However, it is important to remain cautious—this appears to be short-term speculation driven by signs of recovery in first-tier city markets, including a temporary rotation of funds from technology to traditional sectors. Over the long term, I do not believe a real estate market turning point has arrived, and I remain pessimistic about real estate stocks.

Why is a true turning point not yet here? The key factor remains rental yield. In mature international real estate markets, rental returns in a country’s major cities should exceed the long-term government bond rate and ideally be higher than the local mortgage rate. For China’s first-tier cities, rental yields should be above the 10-year government bond rate of 1.9% and preferably above the mortgage rate of 3%. Even accounting for lower holding costs due to the absence of a property tax, a rental yield of around 2% is necessary. Unfortunately, the current average rental yield in first-tier cities is only about 1.8%, indicating that price bubbles have not yet fully deflated.

So far, only one city in China has seen a genuine stabilization and recovery in housing prices: Hong Kong. In the second half of 2025, Hong Kong’s rental yield surpassed its mortgage rate—coinciding with the beginning of its housing price recovery.

It is worth noting that the Shenzhen government attempted a similar policy in August 2024, purchasing second-hand homes. However, the move failed to prevent further declines in Shenzhen’s housing prices. After initial publicity, the policy had little lasting impact on either the rental market or housing prices.

Objectively evaluating Shanghai’s new policy, it may help stabilize market confidence in the near term, but it is unlikely to alter the broader industry trend over the long run. The ultimate effect will depend heavily on implementation details and follow-through, which will require close observation.