Property purchases in smaller cities to be hit by restrictions

Beijing will restrict property purchases in smaller cities as it extends its efforts to rein in the mainland's red-hot housing market.

The restrictions, which will apply to so-called second- and third-tier cities, were unveiled at a State Council meeting chaired by Premier Wen Jiabao on Tuesday. They signal a renewed effort to dampen property prices.

The central government in January unveiled a package of eight austerity measures to put the brakes on rising property prices. For the first time, local governments were required to set targets for average home prices. Following guidelines set by Beijing, 35 major cities moved to restrict registered resident owners in those municipalities from buying more than two flats. The same restrictions are now expected to be imposed in smaller cities.

'The message is clear: the central government wants to weed out speculative investment demand,' said Lee Wee Liat, Samsung Securities' regional head of property research. 'The cities which have imposed home purchase restrictions so far have seen transaction volume drop a pretty drastic 30 to 40 per cent year-on-year.

'In some cases we have seen broad-based price cuts by developers in the magnitude of around 10 per cent. Home purchase restrictions have achieved their objectives in these cities.'

The January measures also required cities to establish and announce new house price control targets for the first quarter. The city governments of Shanghai and Shenzhen announced that house-price increases this year must not exceed 8 per cent and 10 per cent, respectively. The Beijing municipal government has meanwhile predicted that its housing prices will fall slightly this year.