Caixin
Apr 20, 2010 05:03 PM

New Rules Pour Cold Water on Housing Market

[Click for Chinese Version]

A fresh and troublesome surge in nationwide housing prices in March prompted the Chinese government to introduce new measures aimed at cooling the property market.

On April 17, the State Council ordered banks to stop issuing mortgage loans for applicants who already own at least two homes in certain cities. In addition, mortgages are now restricted to potential borrowers who have worked in the same city for more than a year.

Three days earlier, minimum down payments for second homes were raised by the State Council to 50 percent from 40 percent. In addition, it ruled mortgage loan interest rates must not be lower than 1.1 times the base interest rates for homeowners who already have mortgages.

At the April 14 meeting chaired by Premier Wen Jiabao, the State Council reiterated the government's resolve to increase the supply of land for residential housing, subsidized housing and low-cost apartments. Officials said long-idled land bought by developers would be seized by the government. The cabinet also ordered local governments to allocate 70 percent of their total land supplies for low-cost apartments.

The State Council let local governments enact emergency measures to curb housing speculation as well. Some Beijing banks went beyond the latest government rules by raising the minimum down payment to 60 percent for second-time homebuyers.

Moreover, the government is talking about introducing property taxes as a way to subdue the market. A new tax system may be unveiled soon.

"This time, the government is serious" about curbing housing prices, said Lu Ting, an economist at Bank of America-Merrill Lynch.

Big Bang

Explosive growth in the volume of mortgage loans has paralleled a booming property market since the latter half of 2009. In Shanghai, loans to property developers and homebuyers accounted for 50 percent of total new credit in March, according to the Shanghai Bureau of the China Banking Regulatory Commission (CBRC).

The market surged in 2009 after China introduced measures to stimulate property sales in the wake of the global financial crisis. One step was a 30 percent interest rate discount for mortgage loans issued to first-time homebuyers.

These market-boosting measures were revoked in early 2010. But the heat-up for housing continued, mainly due to speculators and investors who continued buying property as a hedge against potential inflation.

A financial officer at a major, state-owned bank told Caixin prices surged after the wealthy adjusted their investment portfolios. After the financial crisis, he said, property and gold replaced stocks as major investment vehicles, driving up housing prices.

Housing prices across the country soared 11.7 percent in March from a year earlier, accelerating from February's 10.7 percent gain, according to the National Bureau of Statistics. The March surge was the biggest since July 2005, when the statistics agency broadened its sample from 35 cities to 70.

Resort hotspot Hainan Province saw the fastest housing price gains. In the provincial capital Haikou, prices rose 64.8 percent year-on-year, while those in Sanya jumped 57.5 percent.

In Beijing, the average new home price soared above 26,000 yuan per square meter, 59.5 percent higher than a year earlier. In third-tier cities such as Jinhua and Wenzhou, home to many of China's best-known speculators, prices jumped more than 20 percent.

The latest spike began around March 14, when the two sessions of the national legislature ended. High housing prices were a hot topic at the sessions, with delegates raising proposals in response to widespread complaints about unaffordable housing. Reflecting those complaints, CCTV commentator Bai Yansong had said about 80 percent of people in Beijing could not afford to buy an apartment.

In addition, Caixin learned, a report submitted to Deputy Premier Li Keqiang said surging prices for housing price posed a threat to social stability.

Time for Action

The government initially hesitated to move against higher prices in March. Caixin learned that the market got suddenly hotter mainly because the government stalled over whether to cool property buying.

Even though CBRC Chairman Liu Mingkang said April 11 that regulators would feel relatively safe if the minimum down payment were raised to 50 or 60 percent of a second apartment's price, CBRC the next day denied media reports that the minimum down payment would be raised to 60 percent.

An adviser to the State Council who declined to be named said
some high-ranking officials feared intervention in the property market would drag down economic growth, raise bank default rates and reduce personal incomes.
   
This adviser, however, believed economic growth would not slow, as low-cost apartments would continue to be built and urbanization would continue to drive growth. He also pointed out that bad loans would not pile up if regulators strengthened supervision and commercial banks managed risk carefully. And he said personal income would be unharmed since only the wealthy buy apartments for investment.

But the government later changed course and turned to its arsenal for fighting overheating in the property market. It's actually a huge arsenal, since the state owns most banks and land.

A Ministry of Land Resources official said the State Council made a decision that it was resolved to stabilize housing prices. Moreover, he said, "no one cares" about business pressures that may be borne by property developers affected by the regulatory restrictions.

That the land ministry and State Council have been working hand-in-hand was illustrated by the fact that the ministry announced its 2010 land-use plan on the same day that the new down payment rates were unveiled.

Under the plan, the supply of new land available for development this year can reach up to 180,000 hectares, up 130 percent from last year. And more than 40 percent of the land earmarked for commercial development will be set aside for apartments smaller than 90 square meters.

The land decision reflected the ministry's resolve to step up property development oversight in light of the price frenzy. "The Ministry of Land Resources had said that housing prices should be determined by the market," said a source close to the State Council. "Now they changed their tone."
 
Most real estate agents think the new rules will be effective. Lin Qian, deputy director of the agency Home Link Co., said the latest down payment floor is above what the homebuyers have recently been putting down.

Zhang Xiaorui, an analyst at real estate consultant DTZ, argued the new rules would deal a heavy blow to speculators whose investment returns will fall.

Most housing developers said the new rule would not affect their businesses. However, Zhang said the policy would affect cash flow first, and developers later would have to significantly decrease their expansion pace.

Many observers say the new rule actually targeted speculation and will not affect housing price movements in the long term.

1 yuan = 14 U.S. cents

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