Property purchases in smaller cities to be hit by restrictions

PUBLISHED : Friday, 15 July, 2011, 12:00am
UPDATED : Friday, 15 July, 2011, 12:00am


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.

The mainland has also tightened liquidity by raising banks' required reserve ratios - the proportion of deposits financial institutions must hold as capital rather than lend out - twice in two months. The ratio has now been raised six times in the course of a year, to a record high of 21.5 per cent.

Lee said some smaller cities in the north had continued to see rapid price increases, including Ordos in Inner Mongolia, Yulin in Shaanxi and Xianghe in Hebei province.

'I think the government will impose purchase restrictions on these places as these are China's ghost cities - they have lots of empty apartments,' he said.

Jason Hu Zhijiang, a senior consultant with mainland property agent Holdways International & Technology, said the central government was worried investors would shift capital to smaller cities, thereby boosting prices. 'This is a message urging them not to take this move.'

However, property consultants do not expect such a move will have any significant impact on the whole market.

'Local governments do not want to see a correction in local property markets as land sales are their major source of revenue,' he said.

In the meeting on Tuesday, the State Council said some cities had relaxed measures required by the central government.