Policy changes required to meet evolving property market demand



A recent meeting of the Political Bureau of the Communist Party of China Central Committee highlighted the need to effectively prevent and resolve risks in key areas, adapt to the significant supply and demand changes in China's real estate market, adjust and optimize real estate policies in a timely manner, implement differentiated policies based on local conditions, make good use of policy tools, better meet the rigid housing demand from first-time buyers and owners looking to move up the property ladder, and promote the stable and healthy development of the real estate market.

The significant changes in supply and demand in China's real estate market have the following implications:

First, there is no longer a housing shortage. China's commercial housing market has experienced rapid development for many years, and housing conditions have significantly improved. According to data from the seventh national population census, the per capita floor area of urban households in China is 36.52 square meters. In Beijing, the per capita floor area of urban households is 33.41 square meters, and in Shanghai, it is 30.58 square meters. These figures show there is no longer a housing shortage, even in first-tier cities like Beijing and Shanghai with large populations.

Second, there is a structural oversupply. Some cities have already experienced oversupply based on the length of the destocking cycle, sales difficulties, and price performance. Since China is still undergoing rapid urbanization, there is a real demand for new housing, and the current market difficulties in some cities are unlikely to be long-term. Instead, they are more likely to be cyclical and structural.

Third, there is no longer a basis for sustained price increases. Sustained price rises were mainly driven by a housing shortage caused by rapid urbanization. Now there is no longer a housing shortage. Moreover, cyclical and structural oversupply could lead to a structural decline in prices.

Fourth, rigid demand, the belief that people have to buy a home regardless of price, and owners looking to move up the property ladder are now the main market drivers. Lack of supply and continuous price increases have contributed to property speculation. Compared with other investment products such as stocks, property investment involves large amounts of capital, low transaction frequencies, and high transaction costs. Buying a house only becomes an important investment channel during a specific period of sustained price increases. With the end of widespread price increases, housing investment and speculation have declined, rigid demand and owners looking to move up the property ladder have now become a major force in the market.

Compared with Japan's real estate bubble, China is still undergoing urbanization, and there is still a gap between per capita income and living standards compared to developed countries. So there is still a certain scale of potential new housing demand. As long as policies are timely and appropriate, the risks in the real estate sector can be controlled. However, many risks are connected such as unfinished buildings and real estate company defaults, which can directly affect the financial system and local finances. Therefore, stabilizing the real estate market is important.

In order to respond to market changes, prevent economic risks, and support both rigid demand and demand from owners moving up the property ladder, it is necessary to optimize real estate policies in a timely manner and adjust restrictions that are no longer appropriate. These control measures include, but are not limited to, restrictions on purchases, loans, sales, prices, and non-ordinary residential properties. Most of these restrictive policies were formulated based on the former market conditions of tight supply and strong investment potential. Now, however, housing is no longer in short supply, and even structural oversupply has emerged. These restrictive policies are no longer appropriate to varying degrees. In addition to adjusting and optimizing restrictive policies, it is also necessary to provide financial support to ensure rigid housing demand is met. This includes reducing mortgage interest rates and transaction taxes and fees.