The Housing Dilemma

By Liu Xinlian

One year after deciding to buy an apartment, Wang Jian, a 25-yearold website editor in Beijing, finally sealed the purchasing deal this June. Her twobed room 95-square-meter apartment in the suburbs of Beijing set her back 1.6 million yuan ($253,968).

“I didnt notice any decrease in price in the past year. Since June the price has been picking up, so I decided to buy quickly,” said Wang.

The same month Wang bought her apartment, Beijing saw home sales rise to 25,602 units, 10.5 percent more than May and 50.6 percent more than June 2011, according to the municipal commission of housing and urbanrural development.

The property market rebound at the beginning of this summer was not unique to Beijing. According to data released by the China Index Academy (CIA), the average home price in 100 major cities edged up 0.05 percent in June from a month ago, ending a nine-month decline.

The Central Government has shown no signs of letting up on its national campaign to control the housing market. During an inspection tour to the city of Changzhou in east Chinas Jiangsu Province on July 7, Premier Wen Jiabao said the government would implement real estate market regulations to curb speculation.

“The government should make curbing speculative purchases a long-term policy and unswervingly carry on control measures over the sector, so as to make home prices return to reasonable levels and avoid price rebounds,” Wen said.

Upward pressure

But while the Central Government seems bent on controlling prices, administrative bodies at the local level are taking a different stance. Dependent on leasing their lands to pay off exorbitant debt, cash-strapped local governments are looking for loopholes and any means necessary to raise money, even if it means circumventing or flat-out ignoring national policy.

Local governments have been increasingly dependent on land-use fees for revenue. According to National Economic News, land sales formed more than 30 percent of the revenue base in 2011 in five big cities, including Beijing, Shanghai, Suzhou, Tianjin and Chongqing.

Driven by the government-induced spending spree to stimulate the economy following the global financial crisis in 2008, local governments borrowed heaping sums of money to facilitate investment in infrastructure projects. According to the National Audit Office, local governments owed 10.7 trillion yuan ($1.7 trillion) at the end of 2010, and 53 percent of that must be paid back before the end of 2012.

Pinning their hopes on selling land to relieve their debt worries, local governments were groaning under the weight of nonperforming loans and a decline in land leasing revenue. Nearly 900 land auctions failed in 2011, about three times more than in 2010, according to Centaline Group, a Hong Kongbased property agency.

Most Chinese cities will not be able to rid their dependence on land sales for revenue in the short term, said Zhang Dawei, Director of the Market Research Department with Beijing Centaline Property Co. Ltd.

Local governments are the largest stakeholder in the land-use market. To secure their income, they are likely to use policy to stop house prices from falling, said Zou Xiaoyun, assistant chief engineer of the China Land Surveying and Planning Institute.

Driven by the urge to revitalize the sluggish housing market and relieve debt woes, local governments have been making efforts to challenge the tightening measures released by the Central Government.

On June 24, central Chinas Henan Province adjusted its certification method for first-time homebuyers to boost demand. Firsttime homebuyers enjoy a mortgage interest rate discount of as much as 30 percent of the benchmark interest rate.

The new policy stipulates that homebuyers who do not have property registered under their names would be identified as first-time buyers whether a buyer used bank loans to buy houses before.

Although the 30-percent discount is confirmed for the first time in a government document, it has already been practiced by the banks for a long time, said Hu Jinghui, Deputy General Manager of 5i5j, a Beijingbased real estate agency.

Other cities have also tried to loosen restrictions or find loopholes in central government policies.

This February, Wuhu in central Chinas Anhui Province said home purchasers would receive subsidies if their newly bought homes were less than 90 square meters in floor space, an obvious break from the states tightening policies.

“Wuhus policy hints at the urgent need of local governments to support the property market and the economy,” said Johnson Hu, an analyst at CIMB Securities.

Under the policy, buyers would also be exempt from paying the deed tax for home purchases.

In October 2011, Foshan, a third-tier city in Guangdong Province, became the nations first city to ease restrictions in buying additional residence.

The monetary policy to keep the economy afloat has also put upward pressure on the housing market.

The Peoples Bank of China announced on July 5 that it would cut the benchmark interest rate for one-year deposits by 25 basis points and that of one-year lending by 31 basis points.

It was the central banks second interest rate cut in two months, apparently designed to stimulate borrowing as the worlds secondlargest economy is expected to slow further in the second quarter of 2012.

However, the cut will also bring down the cost of buying homes and, more importantly, boost confidence in the property market.

After two interest rate cuts, buyers who have a 30-year mortgage of 1 million yuan($158,730) can save 333 yuan ($53) per month.

The loosening monetary policy that encourages first-time buyers to purchase and more people to move into bigger homes will help boost the market, said Li Pingke, an analyst with Guotai Junan Securities.

Enduring mechanism

Currently, with mixed information, the market has changed expectations for future pricing, and residents fear prices will rebound, Wen acknowledged.

Local authorities moves to loosen housing regulation must be corrected in a timely fashion. Those who cheat to escape from the restrictive purchasing policy should be punished, said Wen.

Wen also urged relevant authorities to accelerate the construction of affordable housing and make it sustainable.

Local authorities should push through land approval for affordable housing and invite investors to participate to ensure construction progress and quality, Wen said.

According to Xinhua News Agency, it is the fifth time that Wen talked about the housing market openly this year.

The Ministry of Housing and Urban-Rural Development reiterated on June 6 that the country would continue with its property market regulation policies, which have so far included higher down-payments, property tax trials and the construction of low-income housing.

The countrys central bank and the China Banking Regulatory Commission both clarified on June 14 that they had made no changes on home lending policies and risk weighing for individual mortgage loans.

Even though the government has vowed not to relax property controls, many still doubt that the warming will develop into a complete rebound.

The cash-strained developers will shrink their investment, which will cause insufficient supply, said Qiao Hong, chief economist for Morgan Stanley (Greater China).

“If the housing supply goes further down, the housing price may surge in the future,”said Qiao.

The Central Governments position is not likely to change in the short term, but there will be space for local governments to gradu- ally ease policies,” she added.

Regarding the recent housing price pickup, Li Chen, an analyst with 5i5j, said that good news of interest rate cuts and developers cutting prices, were attributable.

According to Guo Tianyong, Director of the Research Center of Chinas Banking Industry at the Central University of Finance and Economics, the states macro-control policy on the properties industry is deepening, thus house price is more likely to decrease.

The current rebound in the home market mainly relies on first-time buyers, which will weaken as time goes by. Sales may drop in the latter half of the third quarter, said Hu.

Despite the fact that tightening policies have been effective in curbing housing speculation so far, experts still called for longacting policies.

“In the long term, housing price and demand could not be effectively controlled by administrative intervention, such as house purchasing limit. Otherwise, bubbles will reappear once the limit is lifted,” said Jia Kang, Director of the Fiscal Science Research Center of the Ministry of Finance.

If property taxes are levied on real estate owners, it can lead to rational behaviors from both housing supply and demand by posing a tax constraint, Jia said.

The property tax will objectively increase the costs to high-income people who have bought several houses or even luxury houses.

The tax, currently in operation in Shanghai and Chongqing, is considered a heavy tool to curb soaring housing prices.

The government will sum up the experiences from the trials in Shanghai and Chongqing and map out an expansion plan, Jia said.