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China’s home price caps in small cities signal to buyers that prices won’t rebound anytime soon

Analysts say the latest round of measures aim to warn speculators against expecting prices to rebound

PUBLISHED : Tuesday, 26 September, 2017, 12:03pm
UPDATED : Tuesday, 26 September, 2017, 8:22pm

China’s latest round of property tightening measures are not only targeted at pricking the property bubble of smaller cities, but also sending a clear message to these markets – do not expect housing prices to rebound, according to analysts and economists.

Eight second and lower tier cities in China – Chongqing, Nanning, Nanchang, Changsha, Xian, Wuhan, Shijiazhuang and Guiyang – have rolled out stricter housing policies since Friday, where most require homebuyers to hold on for at least two to three years before they can resell any newly purchased flats.

In Shijiazhuang, an industrial hub in northern China, newly purchased flats can only be resold after five years under the new rules.

“The tightening has extended to the lower-tier cities ... as the government wants to convey a strong message to speculators to not expect the market to rebound,” said Liao Qun, China chief economist at Citic Bank International.

“It is determined to get housing prices under control.”

Although prices have been picking up in the eight cities, they have not escalated to form a bubble, according to Liao.

Take Changsha, the provincial capital of Hunan in central China. Liao said the average new home prices there had just exceeded the 10,000 yuan per square metre mark, a relatively low level.

The tightening has extended to the lower-tier cities ... as the government wants to convey a strong message to speculators to not expect the market to rebound
Liao Qun, Citic Bank International

Since late 2016, various major cities across China have adopted a raft of measures ranging from higher mortgage down payments to increased interest rates and price intervention in an attempt to stabilise prices and the property market.

Hong Hao, chief strategist at Bocom International, said previous measures that targeted top-tier cites such as Beijing and Shanghai had forced some of the hot money to find their way into smaller cities, which in turn led to policy tightening expanding to more markets to curb speculation and financial risks.

“The overall mortgage sector has grown too fast, with the average household leverage having already reached nearly 60 per cent,” he said.

With the influx of hot money and a limited new supply due to the government’s destocking efforts in the past two years, there are signs of “panic buying” in some lower-tier cities, warned Alan Jin, property analyst at Mizuho Securities.

The total housing stock in 80 Chinese cities tracked by E-house China R&D Institute dropped 11 per cent year on year to 402 million square metre at the end of July, the lowest level since September 2013.

Jin stressed that policy tightening are necessary in certain mid- and small-sized cities as irrational market sentiments are more actual and serious than reflected through the government monthly data.

In Xian, the capital of northwest China’s Shaanxi Province for example, prices for some new projects had surged 50 per cent in the past year, he said.

The fresh round of tightening comes at a politically sensitive time, ahead of the Communist Party congress next month in which President Xi Jinping is expected to further consolidate his power. It also raised renewed concerns that the government is getting increasingly tougher on the property sector.

But Wang Tao, chief China economist with UBS, said the actual effect of the recent tightening would be mild as Beijing does not intend to see a market crash.

“The ban on reselling will only affect property speculators, not the self-users,” she said.

The government was ensuring the ongoing development of the market, she said, pointing to the example of the mass redevelopment of shanty areas in various cities that have created huge new housing demand.

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