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Chinese residential market feels the chill in new round of property curbs


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Real Estate News & Analysis: May Edition

Chinese residential market feels the chill in new round of property curbs

Traditionally a peak season for housing sales in the country, this year's Chinese "Golden Week" holiday, which followed the Oct. 1 National Day, felt the bite of stricter property purchase policies implemented by a number of cities. The moves could signal a turning point for the Chinese residential real estate market.

During the week, about 20 cities including Beijing, Shenzhen, Xiamen, Suzhou and Chengdu, most of which saw surging home prices and overheated market sentiment in the past year, released city-specific tightening rules, including higher mortgage down payments and purchase limits.

Beijing increased the minimum down payment ratio to 35% from 30% for first-time home buyers and to 50% for second-time buyers. In Shenzhen, those buying a second home now have to put down 70% of the purchase price, up from the previously required 40%. Non-local buyers in Shenzhen are now limited to one unit per family and are only eligible for the purchase if they have paid social insurance in the city in the past five years.

The concentrated policy changes follow the Chinese housing market's strong recovery over the past year. After home markets flagged in 2014, the central government implemented relaxation measures aimed at reviving the sector. However, in some cities, house prices have over-corrected. Average prices for new homes jumped 8.9% on average for the 12-month period ended in June, with cities such as Shenzhen and Xiamen recording annual price increases of up to 47%, the Urban Land Institute found in its recently released Chinese Mainland Real Estate Markets 2016 report, which cites government statistics.

The arrival of the latest restrictive policies in many cities signals the end of a favorable regulatory environment for the housing market, according to Tong Ce Real Estate research director Zhang Hongwei. "The relaxation measures last year have spurred home sales in most cities and helped address the key issue of high new home inventory. … The government has now shifted their focus from reducing the number of unsold homes to curbing soaring housing prices and damping speculation," he said in an interview.

This round of residential market tightening appears to be aimed at buyers of second homes and speculators, but it should be a positive for those who have a fundamental need to buy property, Zhang said.

Zhang expects to see sales slow down in the short term as most people likely will adopt a wait-and-see attitude. Around mid-2017, he expects home prices in some projects to soften. "As the tightening measures take effect, property sales are likely to be lackluster in the next six to eight months. Upcoming new projects will also add supply to the market, forcing developers to offer discounts in some projects to attract buyers," he said.

Additional cities are expected to announce tightening measures, according to Guosen Securities analyst Zhu Honglei. "If the pace of housing price growth in those sizzling hot markets does not slow down in the near term, we could also see the central government introduce more curbs," he said in an interview.

However, he does not expect prices to drop sharply, as the central government aims to keep the economy stable while cooling the property market.

Among property developers, those affected most could be the small and midsize companies that took on more debt in the past year to expand business amid a low-interest rate environment and recovering housing market, according to Zhang. "In the second half of 2015, Chinese developers were active in issuing onshore corporate bonds," he said. "The smaller ones might have trouble in refinancing their debt in 2017 when the market is less profitable."

Additionally, land kings, or those willing to buy land parcels at record prices, could be in trouble, Zhang said. Those who achieved land king status in the past year will probably delay launching their projects in 2017, as a cooler market would lead to narrower profit margins for these projects.