Chinese property market needs long-term mechanism

Six weeks until year end and city governments in China are struggling to meet their goal of preventing house prices from rising too quickly.

Statistics and experts agree that their chances of success are slim.

Guangzhou in south China is a megacity which has just rolled out detailed rules to slow house price inflation, including raising down payments on second homes. Beijing, Shanghai and Shenzhen all raised the threshold to 70 percent recently. These four cities have also restricted unregistered residents from buying apartments, but the rules have not yet yielded fruit as expected.

Of a statistical pool of 70 major cities, 65 saw month-on-month rises in new home prices in October, and 62 reported price gains in existing and second-hand homes, according to the National Bureau of Statistics (NBS).

First-tier cities continued to lead rises, with the prices of new homes in Beijing and Shanghai over 20 percent higher than a year ago, said NBS.

Short term curbs vs. long-term mechanism

The rules have a limited stabilizing effect on commercial housing prices because they are short-term policies.

By the end of the year, housing projects that sell for more than 40,000 yuan (6,564 U.S. dollars) per square meter are not allowed for advance sale, according to Beijing municipal commission for housing and urban-rural development.

"I waited two months to buy an apartment in Daxing District outside the fifth ring, but the project's presale application was denied by the government," said Chen, a Beijing resident. "I don't think the prices will go down anyway if the presale is postponed till next year."

Regulations to curb demand may put a brake on prices for the rest of the year but their effects won't last long, said Chen Guoqiang, deputy head of the China Real Estate Society.

In Shanghai, only 20 percent of current home loans have gone to people purchasing a second home, according to Gu Mingde, deputy director of investigation and research at Shanghai head office of the People's Bank of China. Raising down payments for second-home purchases only affected a small group of people.

If the rules were carried out only to meet the yearly goal, they may further add to supply and demand contradiction, said Ma Guangyuan, an economist.

Industry insiders have noticed that purchasers have been holding back to see if prices drop after the regulations take force, and wonder how long will take for purchasers to start buying again and a new round of price rises.

The market is in urgent need of a long-term mechanism that will allow market to adjust by itself, said Zhang Dawei, director of Centaline Property's research center.

Managing supply-demand contradictions

While previous regulations to restrain demand have been effective, policy needs to focus more on the supply side to ease the supply-demand contradiction.

With stricter home purchase quota policies, investment demand has receded dramatically, and first-home purchasers are a major force in the marketplace.

"A great many first-home purchasers are young people who have just married and started their career. Their income is too high to enjoy low cost housing and too low to afford an apartment in commercial residential buildings," said Zhu Zhongyi, deputy head of the China real estate industry association.

They will become pillars of society and tend to complain about high prices. The government should address their problems by all possible means, said Zhu.

In October, Beijing announced that it will encourage commercial residential building projects with apartments under 90 square meters at 70 percent of the market price. The apartments will be sold to those who intend to own and live in them rather than investors.

"We think too little of the supply side. We should have taken into account the needs of people of different income levels," said Wang Rongwu, deputy head ofBeijing municipal commission of housing and urban-rural development.

He added that not enough housing was offered to purchasers with specific requirements in the past.

"If their housing problem is properly addressed, the prices of high-quality commercial housing will be decided by the market in the future," said Wang.

The policy was carried out in accordance with government's overall guideline for solving the problem - low income parties are guaranteed places to live, the middle classes can afford to buy apartments with favorable policies, and the rich are limited in what they can buy.

According to Zhang Wei, deputy head of Beijing municipal bureau of land resources, 50,000 apartments will be offered to first home purchasers at low prices.

This will greatly change the supply-demand structure because approximately 80,000 new commercial residential apartments are offered each year in Beijing, said Zhang Dawei.

Chen Zhi, deputy head of Beijing real estate industry association, said the policy is significant in stabilizing the market because people can have a clear expectations of house prices in the near future.

Chen said most first home buyers purchased houses "irrationally" because they are afraid that their income will never keep pace that of house prices. "They now have fewer such worries," he said.

So far no other cities have similar polices and industry insiders would like to see the policy popularized in first-tier cities.

It is the fastest way to stabilize housing price without hurting local government land revenue, according to Ren Xingzhou, director of the market economy research institute of the Development Research Center of the State Council.