China Economy

Property investment

China unveils new policies to help farmers buy homes in smaller cities

Aid package to encourage rural residents to buy city properties may face push back from local governments, say analysts

PUBLISHED : Thursday, 10 December, 2015, 12:12pm
UPDATED : Thursday, 10 December, 2015, 9:17pm

China has unveiled new policies to encourage rural residents to buy homes in urban areas as part of an effort to bolster the housing market in smaller cities facing a glut of unsold properties, though analysts questioned the effectiveness of the scheme on a national basis.

Government officials will extend a package of preferential policies to help aid rural residents with first-time home purchases in cities. These include financial and interest payment subsidies, tax allowances, as well as broadening eligibility to include farmers as part of a government-sponsored loan programme known as the Housing Provident Fund, the state-run Economic Information Daily reported on Thursday.

Some analysts questioned the extent of implementation of such policies and their outcome. “It would be an open question if local governments would welcome such policies as these will add pressure to their already-tight finances,” said Carol Wu, head of research at DBS Vickers (Hong Kong), adding that local governments prefer to increase tax revenue instead of offering tax deductions.

Much of the backlog of unsold homes are in China’s third, fourth-tier and even smaller cities. By extending financial aid to rural residents, Beijing hopes to encourage them to settle in urban areas and absorb some of the excess inventory.

Rural residents, typically farmers and immigrant workers, earn relatively low wages and their jobs are often not stable. That’s why the policy also carries risks for financial institutions as there is a lack of clarity over how far the government will go in backing the loans if rural residents miss their mortgage payments.

“The credit information system and loan recovery mechanism is not yet well established in China,” said Lu Zhengwei, chief economist of Industrial Bank, adding that banks would be cautious when it came to issuing mortgages to non-urban residents.

Wu of DBS Vickers said the policy would have little impact on listed developers as most of them have shifted their development focus to first and second-tier cities with limited exposure in small sized cities.

The Chinese government has taken a series of measures this year to help stimulate investment in the property market, including five central bank interest rate cuts. However, high inventory levels persist.

According to the National Bureau of Statistics, China’s real estate inventory totalled 686 million square meters at the end of October, up 18 per cent from a year earlier.

In November President Xi Jinping voiced support for the property sector, including the roll-out of measures to help reduce property inventories.

In a report issued Thursday ratings agency Fitch said central government policy would continue to be a key factor affecting the Chinese housing market in 2016, and it expects further headroom in policy loosening to support the sector’s recovery and expansion.