Oct 10, 2016 12:53 PM

New Restrictions Show Beijing's Growing Concerns of Property Bubble

Last week's long National Day holiday was a turbulent time for China's overheated real estate market, as a growing number of cities rolled out new restrictions to cool prices during a time that's traditionally a prime season for home sales.

The next major signal will come in December at the Central Economic Work Conference, the Communist Party's top economic agenda-setting meeting, which could set the tone for how Beijing will manage the housing market in the year ahead. That meeting could show how housing inventories will be reduced and could stress more localized policies to squash an asset bubble and channel funds back into the real economy.

So far, cities representing more than half of all home sales in China have announced new home-buying restrictions in a bid to cool the market. Some observers have suggested the latest curbs are localized measures targeting specific markets in which prices have been rising too quickly.

A closer look shows cities issuing new restrictions account for nearly a third of China's GDP. Those include top cities like Beijing, Shanghai, Shenzhen and Chengdu, which have been hand-picked by the central government for new restrictions due to excessive overheating and suspected hoarding by developers to further boost prices.

The overheating in such major hubs could spill into neighboring cities, ultimately affecting up to 60 percent of home sales nationwide.

Recent restrictions appear to show the housing market has moved up on Beijing's policy agenda, due to its potential to threaten broader economic security and reform. The weight of new rules has been quite heavy, often exceeding expectation. For example, first-time home buyers in Shenzhen have to make down payments equal to 50 percent of the home's price, and a second apartment requires an even higher 70 percent. Requirements that home buyers in many markets hold a local household registration, or hukou, will further dampen speculation.

Despite restrictions rolled out in some 20 cities over the past few days, home sales during the weeklong holiday jumped. In the first six days of October, 2.51 million square meters of apartments were sold, much more than the 1.4 million square meters a year earlier.

Such sharp rises don't mean new policies are ineffective, since new policies often require time to create an impact. As local governments began to implement the new tougher rules, many home buyers were simply racing to sign contracts while they could. We estimate that average daily home sales in 30 sample cities will fall to 600,000 square meters in the coming quarter from 800,000 or 900,000 in September.

Unlike conditions during previous housing market curbs, a shortage of land supply for new development is more obvious now. In the first nine months in 2016, the residential land supply in 100 medium and large cities dropped by 10 percent compared with the same period last year. The drop was even more obvious in China's megacities such as Shanghai and Beijing, where the land supply dropped by 33 percent and 80 percent respectively.

The contracting new land supply is helping to reduce new apartment inventories. According to a survey of 25 first- and second-tier cities conducted by CRIC, a Chinese property research company, developers in 11 cities can now clear their current stock in less than seven months.

The government should learn from previous experience and increase land supply while taking concurrent measures to curtail speculation. The recent rise of "land kings," or developers snatching up premium land at sky-high prices, is directly due to a dearth of new land for sale.

Following this logic, we believe new property construction and investment will gain some momentum in the fourth quarter.

The effect on the broader economy caused by home-buying restrictions may take two quarters to become apparent, as weakening home sales start to dampen demand for products from related sectors like home appliances and building materials.

The economy could begin to feel a pinch in next year's second quarter if home sales start to drop in the next two months, though the hit could be eased if governments boost the supply of new land for development. The Central Economic Work Conference in December is also likely to aim for slower growth next year, as it focuses on stabilizing and restructuring the economy and guarding against risks.

Guo Lei is the chief macro economy analyst with GF Securities.

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