China Real Estate: Price Decline Accelerates, Government Releases Stimulus

Kent Troutman at the Peterson Institute for International Economics highlights current price growth trends for China’s residential real estate market and finds that prices were down approximately

6% y-o-y in March 2015.

China: Real Estate Price Growth and No. of Cities Reporting Price Declines, July 2005-March 2015

Source: Kent Troutman: Broad-based decline in China’s property market, April 7, 2015

In his post, Troutman reasons that, 'with low loan-to-value ratios and strong household balance sheets,' a sector and economic collapse is not on the cards. However, the Chinese authorities are extremely sensitive to trends in the housing sector and have reacted with a familiar range of stimulus that includes the following policies:

  • Discounted interest rates for first-time buyers: first-time buyers can now claim discounts of up to 20% off base rate for home loans from most banks across China.

  • Relaxed restrictions on second-home purchases: for investors buying a second home, minimum down payments have been cut from 70% to 40% of property value.

  • Lower qualification criteria and increased allowances for public welfare fund loans: all working Chinese pay in a portion of their salary to public welfare fund accounts which, over time, build up and can be used as a form of collateral for a home loan. Account holders can now apply for higher loans than before and have to meet fewer criteria, e.g. minimum months of payment into the fund, minimum amounts in fund accounts, to access home loans.

  • Tax cuts for home sellers: owners selling their homes within five years of buying previously had to pay a 5% sales tax. New rules have cut the holding period to 2 years, effectively removing tax charges for many owners as a means to drive sales and upgrading.

For sector observers, these policies are a familiar blend. Markets have responded positively, with inflows into sector funds relatively buoyant in recent weeks.

Having looked at this sector, and the economy, for some years now, it seems a familiar strategy, not just to boost the sector, but to encourage stock speculation and wealth creation in the stock market, a strategy which has paid off well - and satisfied investors - at times when China’s economy is encountering difficulties.

Looking longer-term, many problems still beset the real estate sector, including widespread indebtedness, mismatch between product and demand and lack of affordable housing.

Solutions to these longer-term issues seem to have been kicked down the road for the time being, but the government will have to eventually pass more significant reforms before it can address the systemic problems with the sector, starting with the property registration law expected to be introduced in late 2015.

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