Central Government’s new measures to cool overheated house prices rely heavily on local government implementation
According to data from the Beijing Statistics Bureau, in the first quarter this year the average price for housing in Beijing leapt up by 15 percent compared with the same period last year.
High housing prices are not limited to Beijing; the phenomenon is happening countrywide. According to statistics from the Ministry of Construction, in April 2006, house prices in 11 of the country’s 700 large and medium-sized cities grew by 11 percent year on year. As a result, the public strongly calls for a “second macro-control” over the domestic real estate market.
On May 17, the State Council put forward six measures to curb escalating house prices and to improve the irrational structure of housing supply. In response to this, relevant ministries and local governments are expected to issue detailed measures for implementation. Wang Yulin, Deputy Director of the Center for Policy Research under the Ministry of Construction, stated that while the previous round of real estate market regulation focused on cracking down on speculation, this time, the task is to limit investment in the real estate sector.
Housing standing unused
According to Hua Wei, Deputy Director of Fudan University’s Real Estate Research Center, the six measures to counter the current exorbitant house prices not only aim to help those who cannot afford houses, but more importantly, to meet the dire need of the middle class, who have the means to buy, if prices had not gone through the roof.
In his opinion, the first of the six measures concerns adjusting the structure of supply, focusing on the development of low- and medium-priced, small to medium-sized ordinary housing, affordable houses and low-rent houses. The fifth measure emphasizes the necessity to accelerate the establishment of an urban low-rent housing system, to standardize the construction of affordable houses, and develop the secondary housing and leasing market. It is also stressed that “step-by-step actions should be taken to help low-income families with the housing problem.”
The six measures therefore become six guiding principles, with which the Central Government aims to bring under control the current heated real estate market for the interest of low-income workers. In addition, the government hopes to distribute houses in a more rational way so as to create a relatively well-developed mechanism for the real estate market and promote the sound development of this new pillar industry. In this sense, the six measures aim to shift the government’s work focus from controlling the demand and investment scale for housing to guiding consumption and readjusting the structure of investment.
While house prices are soaring, house sales have actually dropped, according to statistics issued by relevant authorities. A survey conducted by the National Bureau of Statistics indicates that before the end of April 2006, unused houses all over the country had exceeded 122 million square meters, up by 18.9 percent year on year. This space is sufficient to house 1.22 million families, assuming each house is 100 square meters. The Ministry of Construction also made it clear that in China’s 40 major cities, the allegation of “insufficient house supply” is groundless.
“Individual need is not equivalent to market demand,” said Yi Xianrong from the Institute of Finance and Banking of the Chinese Academy of Social Sciences. He explained that even if one needs a house desperately, without corresponding economic capability, this need would never evolve into market demand. Current house prices have gone far beyond the reach of ordinary people.
“While soaring house prices have excluded middle-to-low income families from the real estate market, those who intended to improve their housing conditions are also prevented from buying in the face of current prices,” said Yi.
Meanwhile, a survey report from the People’s Bank of China indicates that people’s desire to purchase has dropped to a historical new low. Forecasts for the next three months show only 18.2 percent of residents plan to buy houses, down by 1 percent compared with the previous quarter and 3.8 percent compared with the same period of last year. Among the seven cities surveyed, Beijing, Tianjin and Shanghai show the residents’ plummeting enthusiasm for purchasing new houses.
Implementation key
Recent years have seen the Chinese Government take a series of strong measures to restrict excessive investments in the real estate market. The control measures that were first adopted in 2003 began to be followed nationwide in 2005. However, these measures failed to cool down this market. In Beijing, Shanghai, Guangzhou and Shenzhen, China’s main real estate markets, house prices have rebounded heavily, with the highest growth rate hitting 25 percent.
In this case, it’s believed that whether the six measures can be effectively carried out lies in the attitude of local governments, especially the government of cities registering soaring house prices.
Fingers are pointing at local governments’ inadequate efforts to implement the Central Government’s macro-control policies. Some local governments and departments in charge have failed to commit to their obligations, and while reasonable prices have been worked out in theory, actual prices remain high.
This time, local governments have become the targets of the Central Government’s regulation policies. It is clearly indicated in the six measures that local governments, city governments in particular, should take full responsibility and include adjustment of the housing structure and control over house prices in their socioeconomic development objectives. At the same time, local governments that fail to put the macro-control policies into effect, to curb soaring house prices and to solve the conflict between house supply and demand, or are subject to frequent complaints about problems in relocation projects, will be criticized in a circular issued by central authorities.
Moreover, the six measures have also proposed a series of indexes. For example, the public should be informed of the situation of affordable house construction at the end of this September; apartments of less than 90 square meters should account for more than 70 percent of all housing areas; 70 percent of the land for housing construction should be used for small to medium-sized apartments; the land use right will be rescinded if the land in question is left unused for two years; and house buyers should pay at least 30 percent of the total house price when applying for a loan for the remaining part. These requirements tend to make the real estate market more transparent. More importantly, the Central Government will take the results of real estate market control as important references in the appraisal of local governments’ performances--an effective measure for the Central Government to encourage the local governments to improve their work in this field.
Wait and see
Although the six measures have ignited fierce debates, they are still far from being a real restrictive force in the overheated real estate market.省略 reveals that 77.48 percent of the respondents believe the six measures mean a new round of macro-control over the real estate market, so they have decided to cancel plans to buy houses for the time being. Only 10.86 percent of those taking part in the survey say they cannot wait any longer, while 11.66 percent still have no clear idea of the current situation.
Similarly, the real estate circle also takes a wait-and-see attitude toward the six measures. According to several well-known real estate agencies, such as the Golden Keys Investment Group and 5i5j, the promulgation of the six measures has had some negative impact on their business, but they don’t believe this will lead to a sharp drop in future prices. How the real estate market progresses depends on the detailed rules issued by local governments, but one thing is certain, the second-hand housing market will be greatly affected.
As the specific rules have not yet filtered down to real estate developers, they are now finding it difficult to decide what to do next or to explain to their clients what results these policies will bring. For example, when it is stipulated that apartments of less than 90 square meters should account for more than 70 percent of all the housing areas, it’s not clear whether the “70 percent” refers to a proportion in terms of the whole city or in terms of a certain project, or even a certain building.
As for the new policies’ impact on real estate developers, according to the insiders, the rule that commercial banks are not to provide loans to real estate corporations whose capital ratios have not reached 35 percent will not exert pressure on developers. However, such rules as the one that developers are to be selected through public bidding based on land and house price competition, as well as apartment types and house prices, will greatly affect these corporations. A possible result is that while some big real estate developers will gradually evolve into large scale, some small ones will be eliminated in the process of market competition.
Response of Major Cities
Beijing: trading in future housing down by 40 percent
Two weeks before and after the promulgation of the new policies (six measures), trade in Beijing’s real estate market dropped sharply. Statistics from www.bjfdc.省略 show that on June 1, 2006, only 325 apartments were sold in future housing trade, but a week before the number was 519. In the next three days, although there was a slight increase in trade, sold apartments only numbered around 400 every day, a drop of nearly 40 percent compared with the daily trade of 600 apartments before the new policies were issued.
Shanghai: sales fell for the first time
As far as Shanghai’s real estate market in the first half of 2006 is concerned, May proved to be a watershed. After a flurry of sales in March and April, the six measures that were issued in May curbed the trend. Compared with April, housing transactions dropped slightly by 1.11 percent in May, which restricted the surge in sales that took place in March and April.
Guangzhou: a drop of 156 yuan per sq m in May
In May, new building prices dropped for the first time after a half-year increase. Statistics on real estate trade in May, issued by the Guangzhou Bureau of Land Resources and Housing Management, show that the average price of 6,097 yuan per square meter for new buildings fell by 156 yuan per square meter. Compared with April, transaction areas dropped by 40 percent in May.
Shenzhen: second-hand house sales drop 40 percent
In Shenzhen, the first city to work out detailed rules in accordance with the six measures, the real estate market is cooling down. According to the latest statistics from Centaline (China) Property Consultants Ltd., in the week immediately following the May Day holiday, transactions of second-hand houses fell by 40 percent compared with the same period of April. Only 152 of the 36,904 new apartments for sale were sold on May 17