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Shanghai and Tianjin unexpectedly raised down payment requirements for home buyers on Nov. 28 evening, believed as a continuation of previous round of regulations. These new policies signal great significance. Beijing, Shanghai and Shenzhen’s moves in raising credit threshold might mean that credit policies will be widely tightened up.
It’s stringed liquidity and increasing capital cost that get on the market’s nerves. Though such trend is resulted from factors like the upward valuation of the US dollar, the impact on the market speaks for itself. Quite likely, the trend might fundamentally reverse the loose monetary environment needed by the booming real estate market.
Shanghai started to regulate the real estate market since early 2016.
Shanghai made great efforts in cracking down real estate agencies trumping up and spreading rumors of housing price hike in April 2016. Behaviors like concealing pledge of properties and roping consumers in transaction were also investigated strictly. “Loans for down payment” is also on the list of examination. It was declared later that six agencies and seven commercial banks broke the rules and were punished.
On Oct.8, Shanghai Municipal Commission of Housing and Urban-Rural Development and the Urban Planning, Land & Resources Commission of Shanghai Municipality jointly released regulation measures with six aspects like land supply and advance sales management supervised. Later, Shanghai set up a joint work team to supervise the source of capital involved in the land transaction of commercial houses.
Latest policies are released on Nov. 28. It is ruled that from Nov. 29, 2016, first-time home buyers will pay down payments of at least 35 percent, buyers of second houses will have to make a minimum 50 percent down payments, while buyers of commercial properties will pay at least 70 percent.
It is believed that the aforesaid policies represent the three stages of regulations in the real estate market.
This round of housing price hike started from end 2015. Overheated housing market was seen in first-tier cities like Shanghai and Shenzhen in early 2016. Take Shanghai and Shenzhen as an example, inspections over “loans for down payment” were carried out to maintain market order. Later, similar inspections were developed in Beijing too.
During this period, cities like Nanjing, Suzhou and Xiamen also rolled out regulation measures due to rapidly rising housing prices. Main measures include limiting housing price, raising credit threshold and etc.
The second round of regulation measures were intensively launched around the National Day holiday. Over 20 cities across the country all launched their regulation measures during end September and early October, covering aspects like restricting house purchasing and housing price, increasing house supply and etc. It can be seen from some cities’ moves of investigating the source of capital involved in acquiring lands that regulators are tightening up capital.
The third round of regulations measures were mainly launched in November. Cities like Hangzhou, Shenzhen, Nanjing and Wuhan made further efforts in tightening up policies in the real estate market in early and middle November, and focus was laid on monetary policies. The practices of Shanghai and Tianjin followed the same regulation idea.
Liquidity is quietly tightened up
In contrast with the special regulation policies targeting at the real estate industry, the market is more nervous about the stringed monetary policies
On Nov. 29, China’s one-year Interest Rate Swap (IRS) moved up 8 basis points to 3.0875 percent, a new high since April 9, 2015.
The interbank offered rates also surge. On Nov.29, the Shanghai Interbank Offered Rate (Shibor) reported a 14-day winning streak. The overnight Shibor edged up 0.4 basis point to 2.3020 percent, above 2.30 percent for the first time since Sept. 30; the Shibor for one-month loans increased 1.19 basis points to 2.8565 percent, surging for 14 consecutive trading days; the Shibor for three-month loans rose 0.59 basis point to 3.0172 percent, surging for 29 consecutive trading days which is the longest winning streak since end December of 2010.
As to open market operation, the central bank has seen net withdrawal for four consecutive days. The central bank on Nov. 29 carried out a reverse repo of 190 billion yuan, while reverse repos worth 200 billion yuan became due that day.
In the eyes of Zhang Dawei, chief analyst with Centaline Property, the series of moves suggest that capital cost is climbing and monetary liquidity is weakening. Considering that the China Banking Regulatory Commission (CBRC) required examination over the real estate business of financial institutions on Nov. 4, it is easy to see that the tightening of capital goes faster than expected.
According to data provided by Centaline Property, house developers raised 68.488 billion yuan through bond financing in October this year, a month-on-month drop of 40 percent. But only 19.54 billion yuan are raised from Nov.1 through Nov. 28. As sales decline, the easing capital supply of real estate companies might be rapidly reversed.
As to the tightening of the monetary market, analysis from CNFS Data pointed out that this round of regulation is not short-term measures aiming to curb rapid housing price hike but mid- and long-term measures preventing bubbles of asset price in the context of economic new normal.
CNFS Data pointed out that due to severe economic downward pressure, monetary policies tend to be easing in real operation and pump lots of liquidity into the market. Driven by the “scarcity of assets”, lots of capital swarm into the real estate market. As a result, the leverage ratio of household sectors largely climbs, housing prices in hot cities rapidly surge and the risks of the financial system are worsened. Once the hike of housing price is overdrawn or “black swan” events break out in the financial system, the decline of housing price might result in financial risks similar to subprime mortgage crisis in the U.S.
Most of the surveyed believed that it means that the efforts will be further intensified in regulating the real estate market and the regulation will not end in the short run. Zhang held that the regulation in the real estate market will continue for at least another 6-9 months.