2018-08-09

Govt Hopes to Stabilize Home Prices With Successful Reform, Skeptics Expect Price Drop

The Chinese government is serious about keeping a lid on home prices because stimulus and monetary policy have reached the limits of their effectiveness. Stimulating the Chinese economy as is guarantees capital will flow into real estate markets, driving up home prices, increasing development, boosting land sales such that cities rely on it for revenue. Instead, the Chinese government wants capital to flow into the real economy, for credit to reach small and medium enterprises, and for home prices to stabilize thanks to economic growth and rising wages.

Tightening the liquidity of the property market

Since 2018, the central and local governments have successively issued a number of policies to resolutely curb speculative real estate. Under the multi-round control, the property market in Xiamen, Beijing, Shanghai and other places with high housing prices has already begun to show results, especially in the second-hand housing market, which has experienced a substantial decline. On August 8, Chengdu and Hangzhou successively followed up on the new rules of the property market, focusing on cracking down on speculative real estate speculation and rectifying illegal realities in real estate. The industry predicts that market trading liquidity will continue to tighten under the high-pressure policy, and house price rise expectations are significantly weakened. At the same time, the enthusiasm of real estate in the third- and fourth-tier cities is decreasing, and the single industrial structure and the continuous outflow of population will become the risk factors for the real estate market in the third- and fourth-tier cities. In addition, affected by the policy, the real estate financing environment is becoming stricter. At present, various large-scale housing enterprises have begun to expand diversified financing channels, of which ABS financing has become one of the important channels.
Insiders pointed out that the property market is expected to change, many cities' housing prices will enter the down channel. From the perspective of the government, it is not expected that house prices will rise, but they cannot fall. With the bursting of the housing price bubble, the policy hopes that funds will flow to the real economy and revitalize the industry, thus supporting the existing housing price system.
In order to prevent the central bank's latest release of 500 billion liquid funds from flowing into the property market and to prevent the risk of expansion of the real estate bubble, the central government has resolutely curbed the rise in housing prices.

Previously, there were marginal diminishing effects in many rounds of real estate regulation. According to the National Bureau of Statistics, as of the end of June 2018, the price index of 70 new urban residential properties has risen continuously for 37 consecutive months. The first-tier cities have implemented stricter price-limit policies, and the price increase is relatively small, with a maximum increase of 0.63%. .

Affected by the talent grabbing war since 2018, the trend of rising house prices in many second-tier cities is highlighted. According to statistics from Kerry, the second-tier cities continued to rise in the past five months, and the chain rose by 1.4% in June 2018.
In order to stop housing speculation, the government cannot only limit prices because it will only remove speculators who are flipping homes. It will increase the demand from long-term investor/speculators who expect higher prices in the future when the restrictions are lifted. This will show up as housing "shortages" because demand will surge.
Poly Real Estate Research Institute believes that the central government’s statement reflects the government’s determined attitude toward house price regulation and resolutely refuses to allow funds to enter the real estate industry. At the same time, it can clear the liquidity of money to the real economy, repair the credit environment, and hedge the downside risks of the economy.

Zhang Dawei, chief analyst of Zhongyuan Real Estate, believes that after the central government’s statement, the property market will enter the deep water area, and local policies will continue to be tightened.

On July 31, in the face of the rising property market, Shenzhen announced that it would suspend the purchase of houses by companies, the new purchase of commercial apartments cannot be sold for five years, the new purchase of residential houses cannot be sold for three years, the new policy of divorce and repurchase of housing and other loans, slamming speculative investment, blocking Property market liquidity.

Many industry insiders expect that this kind of slamming speculative investment will continue to spread to various cities, not only for individual housing control, but also for cities to restrict the purchase of housing, and to completely block the possibility of investing in real estate.
Chinese invest in real estate (second-home or more) for three main reasons. First, the price appreciation relative to inflation. Second, the implicit government support for home prices. Third and perhaps most importantly, it is a secure asset because property rights are strong. Minority investors in A-shares have weak rights, particularly in state-owned companies. Their shares won't be taken away, but they can only enforce their rights through buying and selling of shares. Most people do not buy A-shares.
Suspension of the purchase of housing by enterprises and institutions may continue to spread to many cities, which will help alleviate this pressure for cities with tight supply and demand structures. The measures to restrict the purchase of houses in Shenzhen, Shanghai, Hangzhou, Changsha and Xi'an have been copied to more cities.

In addition, the Ministry of Housing and Urban-Rural Development also conducted inspections in 30 cities, and various random inspections became the most important feature of the property market regulation in July.

On August 8, the eight departments of Hangzhou jointly rectified the real estate market, focusing on cracking down on speculative real estate, false information release, and illegal and illegal behaviors of housing enterprises and intermediaries. On the same day, the 11 departments of Chengdu jointly launched a special rectification campaign for the real estate market order.

Zhang Dawei expects that the regulation of the property market in the second half of the year will exceed the first half of the year. It is expected that the regulation and control policies for the upgrading of the property market will continue to emerge, and the policy supervision starting from the multi-department such as the Ministry of Housing and Construction will be the main feature of the market in the second half of the year. The market stability will gradually emerge under the policy push.
When the price adjustment is in progress

As a result of the regulation of a round of attacks, Xiamen, which has risen as the vanguard of the property market in the past two or three years, has recently attracted attention due to falling house prices and land prices.

According to the data of Zhongyuan Real Estate, the price of new residential buildings in Xiamen is still at the highest level in history, up 52.9% year-on-year in 2015, but the second-hand housing is down 14% from the highest point in October 2016 and July-August 2017; the premium of land price The rate is also very noticeable.

Another weather vane in Beijing, due to the low supply of new homes, the transaction is concentrated in the second-hand housing market. According to the data of Kerry, the proportion of second-hand housing transactions accounted for 5/6 in the first half of the year. Although the transaction volume of second-hand houses declined slightly in June, it still stayed at a high level. In terms of price, the price of second-hand housing in the first half of the year has stabilized, but in the impact of price-limited housing in June, the price of second-hand housing declined slightly.

According to the report of the Yiju Research Institute, the housing prices in the Beijing area and the Shenzhen-Shenzhen region have declined relatively in the first half of the year. This is related to factors such as the relatively stringent urban policies and the reduction of the housing price bubble.

However, Zhang Dawei believes that these are only isolated cases. At present, there are still few cities in the country where housing prices are lowered, only some areas. He believes that the prices of these cities have risen too fast and too high, exceeding the market demand.
On the other hand, strict regulation, tightening of credit policies, price limits for commercial housing and policy housing for providing price limits have caused changes in the pricing and expectations of housing.

According to the BOC International Research Report, the liquidity of market transactions continued to tighten under the high-pressure policy, and the expectation of rising house prices was significantly weakened.

Yan Yuejin, director of the Yiju Research Institute, said that house prices have indeed fallen a little under the control, and some enterprises are under pressure. For example, many industrial enterprises have invested funds in the property market. If the property market falls, it will be implicated in such physical industries.

Fundamentally, if the physical industry does not perform well, the short-term and medium-term will have an impact on the real estate market. In the short term, the liquidity of the property market has been blocked. Many cities, especially those with trade-related industries in the southeast coast, will reduce their support for the property market. In the medium and long term, the real economy is not good, income is falling, and residential housing consumption will be weak.

Yan Yuejin believes that house prices will enter a consolidation period in the future. The downward force is that the policy does not increase the housing prices, the real estate supervision of the Ministry of Housing and Construction, and the upward force is that the pace of high-end real estate pre-sale certificates is accelerating, which will hinder or pull the house prices.

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