China Residential Market: Heading for a Soft Landing in 2011

Measures are likely to stabilise prices

Issue: Mar 11

Beaufort, a high-end residential development in Beijing by CapitaLand China received strong buyer response at its launch in February 2010

The year 2009 was a spectacular year for China property market. On the average, the asking sale price increased by 22 per cent year-on-year in 2009. The remarkable growth was also seen in the beginning of year 2010. Between January and February 2010, the highest ever sale price of RMB5,745 per square metre with a year-on-year growth of 23 per cent was recorded.

Average Sale Price of Whole China in 2009-2010

Source: Soufun

The sharp increases in price in 2009 and early 2010 have triggered a few rounds of tightening measures since then.

Property Measures and Its Impact on Average Sale Price and Transaction Volume

The first round of measures was introduced in April 2010. It was said to be the toughest measures aimed at curbing speculative demand. Those who were buying their second, third or more homes, were required to pay a higher downpayment and a mortgage rate which is above the benchmark interest rate set by China’s central bank.

However, the policies had only a short-term impact - about two months - on the overall average sale price and transaction volume. The price of RMB5,444 per square metre observed in April 2010 came down to RMB3,765 per square metre in June 2010, a sharp decline of 31 per cent within two months. However, it crept up to RMB5,098 and RMB5,324 per square metre in September and October 2010 respectively. Transaction volume came down by 16 per cent in May 2010 after the April measures.

The continuous increase in property prices after June 2010 triggered the second round of measures in September 2010. The second set of measures were basically a reiteration of the first set in April 2010 with stricter restrictions on home buyers of third homes and above . There was also lesser discount to mortgage rate for first time buyers. Similar to the first set, the second set of measures in September 2010 also led to a price decline of 31 per cent to RMB3,690 per square metre in December 2010. Transaction volume came down by 11 per cent in October 2010 after the April measures. Thereafter, the transaction volume rebounded.

Tightening Measures in 2010/2011

	Before	1st Round (Apr 10)	2nd Round (Sep 10)	3rd Round (Jan 11)
First Time Buyers
Downpayment	20% or 30%	30% if GFA >90sqm	30%	30%
Mortgage Rate	0.7x PBOC	0.7x PBOC	0.85x PBOC	0.85x PBOC
Second Home Buyers
Downpayment	30% or 40%	50%	50%	60%
Mortgage Rate	< 0.7x PBOC	1.1x PBOC	1.1x PBOC	1.1x PBOC
Third & Above Home Buyers
Downpayment	30% or 40%	Commercial Banks Have Right to Reject	Prohibited	Prohibited
Mortgage Rate	< 0.7x PBOC	Commercial Banks Have Right to Reject	Prohibited	Prohibited

Source: CapitaLand Research

Impact of Policies on Average Sale Price and Transaction Volume

Source: Soufun

Despite the two rounds of measures introduced, many cities continued to experience huge price growth in 2010. Fourteen major cities saw an average year-on-year rise of 22 per cent. The highest growth was observed in Hangzhou and Nanjing which recorded increases of 43 per cent year-on-year and 34 per cent year-on-year respectively. The first tier cities recorded an average year-on-year growth of 24 per cent. Four in-land cities – Chengdu, Chongqing, Wuhan and Xi’an – saw an average year-on-year growth of 17 per cent with transaction price of less than RMB6,000 per square metre in 2010.

Average Sale Price of Fourteen Cities in China in 2010

Source: Soufun

Why Little Impact?

Fundamental demand from first home buyers and upgraders might be driving transaction volume and property price despite past few rounds of property measures.

First home buyers arising from urbanisation

First home buyers arising from urbanisation

Source: United Nations, Nomura & CapitaLand Research

Just like Japan in 1965, the current urbanisation level in China is still relatively low. The current rate of one percentage point increase per annum implies that 13 million people will need new houses in urban areas each year. This translates to around four million units of new houses or 377 million square metres of floor space needed each year.

Upgrader demand

The common aspiration in China is to own a condominium built by private developers. Given the poor quality of old buildings, home owners may look to upgrade, It is estimated that 60 per cent of the total housing stock in China are more than 20 years old, making these owners potential upgraders.

Rental housing constitutes the remaining percentage
Source: Nomura & CapitaLand Research

2011 Property Measures

The unfavorable results of the first two measures have again triggered another round of tightening measures. The third round was announced in January 2011. This time, the downpayment was raised from 50 per cent to 60 per cent for second home purchases. Furthermore, there were seven other key measures announced.

Details of Seven Key Measures
1	The local governments must set and release price growth target in accordance with local economic development, disposable income and affordability in 1Q11
2	Speed up the supply of public housing
3	Broaden the business tax base (5.5% rate unchanged) to total sales proceeds (from capital gain) for common residential properties re-transacted within five years. Strengthening collection of land appreciation tax (LAT) and individual gains tax from property transactions
4	Make sure the new land supply in 2011 will be above the average land supply over the past two years (70% of land supply for public housing and small-to-medium sized housing)
5	Implement strict home purchases restrictions in municipal cities, provincial capitals and other overheated cities. Local households already with two or above homes, non-local households already with one or more homes or non-local households without one year’s tax proof are not allowed to buy new homes
6	Local governments are required to take responsibility on public housing construction and property price stabilisation and have to report to State Council if they fail to meet the targets
7	Monitor media reports and encourage the promotion of successful experiences in property price stabilisation and public housing

Source: Government announcements

In addition, the Chongqing and Shanghai governments kicked off the real estate tax, with effect from January 28 2011, with Shanghai targeting at high-end homes while Chongqing targeted at newly purchased homes.

Furthermore, many cities have issued home purchase restriction orders. On February 15, 2011, Beijing announced a stricter version of purchase restrictions to curb rising property prices. Thereafter, Shanghai and Guangzhou also further restricted home purchases. Essentially, the three cities banned local residents who owned two or more homes from buying more property. Non-local homeowners were also banned from making additional purchases.

Soft Landing in 2011?

Despite the sound demand fundamentals, 2011 looks like it will be a year of soft landing. This is affirmed by Premier Wen who said on December 26, 2010 that government will put in more effort to curb rising property prices. In his message, three key measures were mentioned:

Recognition of government’s contribution to improve housing provision, with a pledge of renewed effort to maintain progress
Social welfare housing is the top focus in 2011
Government’s role and responsibility in the housing market are clearly indicated

There is already evidence in Beijing that transaction volume has dropped sharply after the stricter February 15 round of purchase restrictions. Many developers are also delaying their launches.

However, property prices are likely to remain relatively stable. The central government has already stipulated that the land supply of policy housing, old area redevelopment and mass flats should not be less than 70 per cent of total land supply. Given that only 30 per cent of the land will be allocated for private housing, it is unlikely that developers will cut property prices aggressively with tighter supply expected in the market.

All in all, China housing market is likely to experience a soft landing in 2011 with more serious note by the government to tighten the housing market further in order to ensure a more sustainable property market. The transaction volume is likely to decline in many cities. In cities which experienced large price increases in 2010, they are expected to have higher policy risk. Nevertheless, this is likely to be for a short term as the demand fundamentals in China remain sound.

Article is contributed by Neo Poh Har, Research Manager, CapitaLand Limited

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