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China Tests Out Intervening in Housing Market to Tame Prices

06/08/2021 | 08:24am EDT

By Stella Yifan Xie and Chong Koh Ping

Chinese cities are stepping up efforts to control one of the biggest problems of the country's post-pandemic economy: runaway housing prices.

The southern city of Shenzhen, where a modest-size apartment typically costs more than $1 million, is emerging as a battleground. In recent months, officials there have tried a number of tactics to limit speculation and keep price appreciation under control.

Among the most aggressive is a plan, thought to be China's first, to manage home-sale values by setting guidance prices for banks to follow when approving mortgage loans.

Under the new rules, maximum prices were laid out by authorities in an 84-page document released in February that listed more than 3,500 property developments citywide. Several banks pledged to limit financing on properties whose sales prices exceeded the prescribed values.

Buyers could pay more if they wanted to, but doing so would mean spending more up front for down payments, potentially curbing demand. Several large online property-listing platforms also removed advertised prices on existing homes and replaced them with the government's guidance prices.

The guidance-price policy follows other steps, including a crackdown on business loans misused for buying homes and moves to limit crowdfunding to pay for properties. Authorities are also trying to fix loopholes that allowed people to get around earlier restrictions, such as limits on the number of properties married couples can own.

Shenzhen officials are planning to supply more land this year for new housing, which they hope will ease price pressures.

Other cities, including Nanjing and Hefei, both in eastern China, are implementing localized policies to manage the market, including restrictions on purchases in popular districts.

In Dongguan, near Shenzhen, authorities unveiled their own guidance prices for secondhand homes in March. In late May, the southwestern city of Chengdu said it would impose guidance prices for secondhand homes in more than 200 complexes and refresh the prices every six months.

Such surgical measures, as Goldman Sachs Group Inc. described them in a recent report, offer Chinese leaders more flexibility to contain property prices without the blunt force of economywide moves such as raising interest rates, which could overshoot and derail China's economic recovery.

"Policy makers do not want to see house prices either rising sharply or falling sharply," Goldman Sachs said. A further surge in housing prices would worsen affordability, while a slump could destabilize the economy the report said.

Some of the moves seem to be working. Shenzhen's secondhand home market cooled off quickly in April, with nearly 4,900 existing apartments sold, down 28% from March and nearly 36% from a year earlier, according to data from Wind. The number declined further to around 3,000 units in May, down 65% from a year ago.

Secondhand housing prices in the city stopped climbing in April from a month earlier, after rising 1.7%, 0.9% and 0.4% in the first three months this year, respectively. In Hefei, transactions of secondhand homes dropped 27% in April, a month after the new rules kicked in.

There are a few cities where prices are falling, notably in northern China, where the heavy-industry-led local economy isn't performing as well as that of the more dynamic south.

But nationwide, the property boom is showing little sign of abating. In April, new-home prices in 70 major cities grew at the fastest pace in eight months, according to China's National Bureau of Statistics.

Prices of secondhand homes in Shenzhen were still 12% higher than a year earlier. The average price for an existing home in Shenzhen in May was about $11,000 a square meter, according to property website Fang.com, or about $1.9 million for a 1,900-square-foot apartment, the typical home size in the U.S.

Some homeowners are skeptical that the more localized measures will work in the longer term, since many forces pushing people to pour money into real estate remain unchanged.

Capital controls make it hard for Chinese families to invest overseas, and some are skeptical of local stock markets. Many Chinese investors think housing is a surer bet because they think the government would intervene to protect the market if prices fell significantly, given property's importance to social stability.

Chinese property buyers also have a long history of evading government rules and will likely try to do so now, experts say. Some buyers say they plan to start moving their money to cities that don't have strict controls or steer it into other speculative behavior.

Liu Weiqiang, who started investing in Shenzhen property in early 2006, said he went through various hoops to bypass government-imposed purchase restrictions in previous years. He even divorced his wife to get around older Shenzhen rules that limited to two the number of homes families could own.

By 2010, he and his ex-wife invested in a total of 11 apartments, including some purchased under friends' names.

Mr. Liu said he is now more focused on trading Chinese stocks but that he may also invest in properties in places other than Shenzhen.

"The Shenzhen government appears to be serious this year," said Mr. Liu, 45 years old. "This has caused a big blow to speculators." Still, he says the rules won't fundamentally alter the upward trend of housing prices, given the excessive liquidity sloshing around global markets.

Christine Li, head of research at Knight Frank Asia-Pacific, said that the kinds of micromanaging tools authorities are using can help artificially suppress prices while giving authorities flexibility to pull back when necessary.

But buyers and sellers can circumvent the policies, in some cases by making private transaction arrangements, she said.

Home to some of China's technology giants including Tencent Holdings Ltd. and Huawei Technologies Co., as well as being a financial hub, Shenzhen remains one of the fastest-growing cities in China and a magnet for young workers.

In late May, the city released draft rules that would change how it grants new residency permits to slow the influx of residents, a driver of home demand.

But such rules could wind up shutting needed workers out of Shenzhen without improving affordability for home buyers, said Dan Wang, chief economist at Hang Seng Bank China. Young workers aren't the primary source of demand, she said.

The price-to-income ratio in Shenzhen -- an affordability gauge that measures the average price of a roughly 1,100-square-foot apartment compared with per capita disposable income -- was 36.1 as of 2019, the most recent year for which data was available. That was the highest among Chinese megacities and compared with around 25 in Shanghai and Beijing, according to CBRE Research.

While the new property-market restrictions could hurt speculators and curb some of the price appreciation owners were hoping for, at least one group stands to gain: buyers who up to now have struggled to afford to buy.

Li Hao, a bank employee who moved to Shenzhen five years ago after graduating from college, said she hopes to benefit from the new government policies as she hunts for her first apartment.

Finding a home isn't a problem, she said: "It's just a matter of whether you have the money."

Write to Stella Yifan Xie at stella.xie@wsj.com and Chong Koh Ping at chong.kohping@wsj.com

(END) Dow Jones Newswires

06-08-21 1024ET

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ChangeLast1st jan.
DJ INDUSTRIAL 0.24% 35144.31 Delayed Quote.14.56%
GUANGZHOU AUTOMOBILE GROUP CO., LTD. -4.25% 6.76 End-of-day quote.-21.58%
HANG SENG -4.00% 26204.62 Real-time Quote.-3.77%
HANG SENG BANK LIMITED 0.80% 151.1 End-of-day quote.13.01%
TENCENT HOLDINGS LIMITED -7.72% 490 End-of-day quote.-13.12%
THE GOLDMAN SACHS GROUP, INC. 0.49% 375.9 Delayed Quote.42.54%
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