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April 18, 2016

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Déjà vu? Hitting the brakeson residential home buying

THE Shanghai government’s latest initiatives to cool an overheated housing market may slow sales and discourage buyers, but they won’t affect prices much, industry analysts predict.

They said the recent round of tightening measures, which came into effect on March 25, are the toughest ever enacted in the city.

“Without a doubt, home purchases will shrink, while housing prices, as far as I can see, will most likely hover around current levels,” said Albert Lau, managing director of China operations at Savills, an international real estate services broker.

The new measures include a minimum 70 percent down payment for second-home mortgages if the property is defined as a “non-normal” and a minimum 50 percent down payment on houses considered “normal.” Previously, a 40 percent down payment was required for both categories of housing.

“Normal” homes within the Inner-Ring Road are defined as those no larger than 140 square meters and costing less than 4.5 million yuan (US$694,194). Between the Inner- and Outer-Ring roads, “normal” houses are those costing under 3.1 million yuan, and beyond the Outer-Ring Road, below 2.3 million yuan. All other homes are considered “non-normal.”

While the government wants to protect the interests of first-time homebuyers, it considers the purchase of second homes, some of which for investment purposes, fair game in controlling the property market. In essence, the new down payment rules raise the upfront cost of all second-home buyers, but the heaviest burden falls on those buying larger, more expensive units.

The new rules also change the definition of first-time homebuyers. It no longer includes people who have paid off the mortgages on their first homes and can qualify for preferential bank loans in purchasing a second home.

City dwellers without local residency permits also get stung by the new regulations. In the past, they were entitled to buying homes after living in the city for accumulated 24 months within three years. Now they must provide documentation to show they have lived here for at least five consecutive years.

“The city’s housing market will surely cool down as the government hoped, but the impact may be rather short-term, lasting between three to six months,” said Lau.

Market data showed a quick public response. In the week immediately after the new policies were implemented, new home purchases in Shanghai plunged 60 percent from the previous seven-day period, to 284,000 square meters. In the following week, they dropped 37 percent to 180,000 square meters, according to Shanghai Centaline Property Consultants Ltd.

At the same time, the average cost of new houses fell 3.4 percent in the first week to 32,916 yuan per square meter, and then dropped 13.3 percent to a six-month low of 28,533 yuan. The declines mainly reflected a shift to lower-cost homes.

“The tightening measures continued to damp buying momentum among home seekers, particularly in the high-end and luxury segments,” said Lu Wenxi, a senior manager of research at Centaline Property. “As transaction volumes fall with sentiment, some developers with tight cash flow and some individual sellers may be willing to consider lowering their prices to lure buyers.”

Government policies on the residential property market have yo-yoed in recent years. When prices skyrocket, controls are introduced to discourage buyers. When demand goes slack, restrictions are loosened.

The latest set of controls comes about a year after the central government relaxed mortgage policies in an effort to boost housing demand and spur economic growth. Even as recently as February, easing was the watchword when the deed tax in Shanghai, Beijing, Guangzhou and Shenzhen was cut for owners of single properties.

Still, authorities have been alarmed by the sharp rise in demand triggered by more lenient policies.

“Home prices in Shanghai have been rising at a notably faster pace since the second half of last year, with some irrationality appearing,” Gu Jinshan, chief of Shanghai’s Housing and Urban-Rural Development Administration, told a media conference in late March.

He cited cases like Daning in Jing’an District, where home prices jumped 160 percent in the past 12 months.

“Some of the major reasons behind the soaring prices are abundant liquidity, preferential credit and tax policies, a capital investment shift from the stock market and tight housing inventories,” Gu said.

Analysts are mixed in opinions about the best way to keep order in the housing market.

“It is time to cool off because an overheated market will create huge bubbles,” said Joe Zhou, head of China research at Jones Lang LaSalle, a global real estate consultancy. “However, the biggest issue in the market now should be how to tackle an inadequate supply of homes instead of curbing home prices.”

The municipal government is pledging to increase the availability of land parcels for residential development, with emphasis on providing sites for development of smaller home sizes.

James Macdonald, director of research at Savills China, said he believes house prices will remain stable for the time being. They will feel the heat only if the new measures remain in place for an extended period of time, resulting in a buildup of unsold housing stock, he noted.

“The latest tightening in policy is likely to reduce sales volumes, slow market activity and cool price growth, though prices are not expected to come down much,” he said.


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