China has seen a housing boom since early 2016. As shown in Figure 1, some key real estate indicators, including total amount of transactions, floor space sold of commercial buildings, and land purchased by real estate developers, have all shown better performance in 2016 compared to the second half of 2015.
The number of cities that recorded price surges rose considerably. Of the 70 major cities monitored by the National Bureau of Statistics, 55 reported price increases in newly built market housing month-to-month in February 2016, compared to just 21 in December 2015.
Figure 1. Year on Year Growth Rates of Some Real Estate Indicators (%)
Source: National Bureau of Statistics. (14 June 2017). Performance of the National Real Estate Market: January-May 2017. Retrieved from http://www.stats.gov.cn/tjsj/zxfb/201706/t20170614_1503166.html
It should be noted that this housing boom has largely taken place in some high-tier cities. While sky-rocking prices and the resultant unaffordability have become the major housing problem in many high-tier cities, many low-tier regions are still desperate to reduce their high volume of inventories for economic revival.
The de-stocking stimuli policies implemented at the end of 2015, huge capital flows to the real estate sector in 2016, and surging land prices have underpinned this housing boom in high-tier cites. In particular, housing demand remains strong in high-tier cities. China has witnessed an expansion of its urban population by approximately 250 million in the past decade. Under a hierarchical administrative system of Chinese cities, governments at provincial levels tend to allocate more resources to higher-tier cities, implicitly directing population inflows to high-tier cities and boosting their housing markets.
Tightening measures have been launched to temper the market since end-September 2016. While the first-tier cities reaffirmed their existing rigid purchase rules, 19 cities with price surges in recent months have re-introduced purchase limitation measures which were abandoned last summer. Meanwhile, over 30 cities have enhanced their mortgage thresholds, including higher down-payments and stricter inspections of mortgage applications. However, such tightening measures have had moderate effects in cooling off the market. Figure 1 shows that the volumes of housing transactions, sale amounts, and land deals have continued their relatively fast growth in the following months.
The leadership has recently shown a stronger determination to further cool the market. In the Government Working Report on March 16, 2017, the Prime Minster affirmed the purpose of housing as accommodation and proposed that future real estate measures would tailor to the regional circumstances to maintain balanced housing development across China, that is, de-stocking policies in regions with high housing inventories and strict regulations in some cities to constrain the excessive increase in housing prices.
Over 40 regions, most of which have witnessed price surges in the past months, have responded to this promptly and initiated tightening measures right after the release of the Government Report, including credit restrictions, market entrance thresholds, conditions on property resale, land supplies, etc.
Most such cities have reset the scope of first-property buyers. Individual buyers who purchased properties with cash or have cleared up their mortgages will no longer be treated as first-property buyers. Non-first-property buyers will now only get smaller mortgage loans. In cities like Beijing and Tianjin, mortgage applicants for second-property purchases may borrow up to 40 percent of the total amount of the property with a length of no more than 25 years, while first-property buyers may obtain mortgages equivalent to 70 percent of the total with a length of 30 years.
The number of cities that enforced purchase limitation measures increased to 45, up from 5 as of August 2016. Some cities have further tightened their grip on purchase limitations. In Hangzhou and Tianjin, single persons (including divorcees) with local hukou may only purchase one unit.Some cities have raised the bar on market entrance. For example, residents without local hukou will have to pay taxes and pensions to the regional bureaus for a longer period before they can make purchases.
New measures on property resale have been introduced in 30 regions, and the affected homeowners are now not allowed to sell their properties within two to five years from the dates when they obtain their property ownership certificates.
The leadership needs to work on fiscal and taxation rearrangements to remove local governments’ heavy reliance on the land sector.
The land supply mechanism has also been tightened. On April 6, 2017, the Ministry of Land Resources and the Ministry of Housing and Urban and Rural Development jointly issued a measure on land supply for residential use. While cities with high inventories should reduce or halt land supplies for residential use, cities with surging housing prices should supply more land for housing construction. Meanwhile, local governments are required to submit biannual reports of the performance of regional land supplies to the Ministry of Land Resources, and make mid- and long-term plans of land supplies available to the public. This could help set up a transparent supervision mechanism for land supply and weaken the power of local governments in land markets.
These tightening measures have already had immediate effects on the markets. Figure 1 shows the slowdown of growth of housing transactions and sale amounts in May 2017. Of the statistics pool of 70 major cities, the number of cities with price increases of newly built market housing month-to-month decreased from 67 in February 2017 to 61 in May 2017. Markets in high-tier cities have been particularly affected by the regulations. 6 out of the 15 sample first- and second-tier cities recorded month-to-month price decreases of newly built market housing in May 2017. It will not be surprising to see further market deterioration in the near future, as administrative measures of purchase limitations directly reduce transactions and credit restrictions weaken the purchasing power of buyers.
This market deterioration will inevitably affect economic performance, given the significance of the real estate sector to the overall economy. The housing boom in 2016 has helped to keep year-on-year GDP growth at 6.7 percent in 2016, implying that China is still heavily reliant on the traditional housing-led model to juice the economy.
The leadership was seemingly facing the dilemma of driving growth while preventing the housing market from overheating and easing public discontents from housing unaffordability. This hesitation helps explain the limited efforts of the measures launched at end-September 2016.
The recent real estate regulations could be the strictest round of regulations in the past decade in terms of geographical coverage and the intensity of measures, demonstrating the stronger than ever determination of the leadership to rein in housing prices, after hesitation and struggles with the dilemma.
While administrative regulations could have immediate effects on cooling off the market, they may be unable to curb the price surge and ease the unaffordability problem in high-tier cities, as observed from the outcomes of previous rounds of real estate regulations in the past decade. China has relied heavily on administrative measures to regulate the market, largely due to the underdevelopment of market mechanisms, including the market supervision system, tax measures to constrain speculation, land supply mechanism which could respond to market signals, etc. This has left the leadership with no choice but to turn to administrative measures.
The 2017 Government Report not only shows the leadership’s strong determination to rein in housing prices, but also a clear overall strategy for future housing development, that is, to improve market mechanisms by institutional rearrangements in land, fiscal, tax, and administrative aspects to enable more power to be transferred from the government to the market and to reduce the excessive involvement of the government in the housing market.
However, local governments might not have incentives to loosen their grip on the real estate sector, and are seemingly continually addicted to the land sector for regional development. In the first half of 2017, the average price in 300 cities increased by 40 percent year on year to 2,249 yuan/m2, and land leasing fees reached 1.47 trillion yuan, a year on year increase of 34 percent. As shown in Figure 1, land purchased by real estate developers still keep an overall upward trend, in contrast to the slowdowns in housing transactions and amounts in the first five months of 2017. The land market is seemingly not bothered by the recent regulations.
The leadership needs to work on fiscal and taxation rearrangements to remove local governments’ heavy reliance on the land sector. This will enable them to commit to the power transfer from the government to the market, and to market mechanisms to sustain the market. Although this proposal has been in place for years, no significant progress has been observed so far.
Sustainable housing development also calls for political efforts on the hierarchical administrative system to balance resource allocation across different tier cities. This could ultimately encourage more population flows to lower-tier regions to reduce the housing inventories in low-tier regions and alleviate discontent from unaffordability in high-tier cities, which are the major housing problems in China today. However, work on adjusting the hierarchical administrative system is seemingly yet on the priority list of the leadership.