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In the past five years, the Chinese government has put forward the slogan “Housing is not for speculation”, that is, “Houses are for living in, not for speculation”. The purpose is to crack down on speculative demand and curb the rapid rise in housing prices.
Since then, the Chinese government’s suppression of the property market has continued to increase. By the second half of 2021, China’s real estate will drop to a freezing point, and indicators such as transaction volume and investment amount have even been “halved”. A number of real estate companies represented by Evergrande have also fallen into a serious business crisis.
At the beginning of this year, China was suddenly attacked by the mutated strain of the new coronavirus Omicron. Central cities such as Shanghai and Beijing, as well as more large and medium-sized cities were locked down for a long time. The economic difficulties in the second quarter were comparable to 2020 at the beginning of the epidemic. the first quarter of the year. The difficulty and urgency of revitalizing the economy are getting higher and higher.
Over the past 20 years, China’s economy has encountered difficulties, and the real estate industry has been stimulated to become a “panacea”. On April 29, the Chinese government sent a signal, saying that it “supports local governments to improve real estate policies based on local realities.” Governments around the world have eased restrictions and thrown out various stimulus policies.
However, in the past two months, the property market has not rebounded as quickly as the outside world imagined, leading the Chinese economy out of the predicament. What is the reason behind this? What is the future of the real estate market?
Freezing and excitement
“The market has bottomed out.” Yu Liang, chairman of the board of directors at the Vanke shareholders meeting on June 28, said that in the first quarter of 2022, the sales of commercial housing in first- and second-tier cities fell by 36% year-on-year. In April, the situation was even worse. The decline in commercial residential sales in tier cities widened to 59% year-on-year.
If you look at the whole of China, no matter what dimension you look at, mainland real estate companies are at a low point – data from the Kerui Real Estate Research Center shows that in the first five months of 2022, the transaction area of commercial housing in 100 cities across the country fell by 51% year-on-year. During the same period, the top 100 real estate companies in the country fell for five consecutive months, and the decline expanded month by month, from 39.7% in January to 59.4% in May.
This situation is mainly caused by the combination of long-term policies and short-term epidemic shocks. Beginning in 2020, the Chinese government has successively issued a series of policies that have a profound impact on the real estate industry, such as housing transaction price guidance to combat real estate speculation and stabilize property market prices. In addition, in August 2020, China proposed “three red lines” for the financing of key real estate enterprises, and at the end of 2020, it proposed a ceiling on the concentration of real estate loans of financial institutions, two of which have profoundly changed the real estate financial landscape.
Throughout 2021, the real estate industry is undergoing in-depth adjustment, and large-scale real estate companies such as Evergrande and Sunac have also been struggling to cope with debt pressure this year.
However, since March this year, the epidemic has struck central cities such as Beijing and Shanghai. In addition, a large number of cities have entered a state of closure from time to time, which has made economic expectations deteriorate rapidly, and the sales of the property market have “halved” and fell to the bottom.
The Chinese government’s desire to save the economy is becoming more and more urgent, and it even requires local governments to “do whatever they need” to stimulate the real estate industry. “No speculation” positioning, but clearly proposed to support local governments to improve real estate policies based on local realities, support rigid and improved housing needs, and optimize the supervision of pre-sale funds for commercial housing. This is considered by the market to be the most lenient statement from the central government on the real estate industry since the current round of regulation in 2016.
Local governments responded. Since the beginning of March 2022, more than 130 cities have introduced policies to loosen property market regulation, including “reducing the mortgage down payment ratio” and “relaxing the threshold for purchase and sale restrictions”, and the central government has also introduced comprehensive “interest rate cuts” and structural loose.
More than 10 cities have even announced the introduction of the housing ticket resettlement method in the renovation of shanty towns, that is, the government will issue housing tickets to the owners of the expropriated houses. Purchase real estate from developers designated by the government within the validity period.
The cold winter of the property market in the past six years has been reversed at the turn of this year’s spring and summer.
Tried and tested?
In times of economic difficulties, stimulating the property market has been repeated in China.
In 2008, the subprime mortgage crisis broke out in the United States, and the financial tsunami spread to the world. In November of that year, China’s import and export data suddenly jumped off a cliff. The export growth rate dropped from 19.2% in the previous month to -2.2%, and the import growth rate fell from 15.7% in the previous month. to -17.9%.
In order to stimulate real estate and boost the economy, the Ministry of Finance announced in 2008 that the deed tax rate for individuals purchasing a house for the first time was lowered to 1%, and the stamp duty and land value-added tax were temporarily exempted for the purchase and sale of commercial housing by individuals. The People’s Bank of China announced that the lower limit of the loan interest rate for first-time home buyers and ordinary improved home buyers is 0.7 times the benchmark interest rate, and the minimum down payment ratio is adjusted to 20%.
These two powerful drugs make the real estate’s pulling effect very dazzling. Just after the first quarter of 2009, 24 of the 30 key cities saw a month-on-month increase in the area of residential transactions, and 10 cities saw a month-on-month increase of more than 50%.
By 2016, China started a round of “monetized resettlement for shantytown reform”. In short, the “old and broken” areas in the city that were difficult to support were demolished, and cash subsidies were given to the demolition households to encourage them to use the money again. Buy a house.
The addition of monetization of shed reform is like preparing firewood, lighting a flame, and pouring a pot of oil on it—the fire in China’s real estate market is “surging”.
China’s real estate market is “rising both in volume and price”, and a number of real estate companies, including Evergrande, have expanded in an instant through aggressive high-leverage operations and the “east wind” of the policy.
The logic behind this is the importance of the real estate industry.
Hu Rong, assistant professor of real estate and finance at the Chinese University of Hong Kong Business School, told BBC Chinese that real estate is a pillar industry, and housing is the main consumption and investment expenditure of residents.
Hu Rong pointed out the important background of the current policy: on the one hand, the overall consumption demand of residents is sluggish, and the sales of real estate are particularly weak, thus dragging down the overall economic growth; efficient.
“Therefore, the proper use of monetary policy and the relaxation of some restrictive measures can help stabilize the real estate market and thus make a greater contribution to the growth of the overall economy.” Hu Rong said.
Not as effective as before
Different from the previous rounds of stimulating “fire cooking oil”, despite the frequent deregulation policies of the property market in various places, the market response was lukewarm.
Shanghai E-House Research Institute calculated that in May, the overall price of new commercial housing in 70 cities decreased by 0.2% month-on-month; second-hand housing prices fell even more. In May, the overall second-hand housing prices in 70 cities decreased by 0.4% month-on-month and 2.2% year-on-year.
In the face of the enthusiastic loosening policies of local governments, consumers wait and see with money, so that housing prices do not rise but fall.
Yu Liang, chairman of Vanke, said at a recent board meeting that after the property market bottomed out, it will not rebound quickly, but will experience a slow recovery process. Since 2015, driven by factors such as the increase in population, the acceleration of new urbanization, and the monetization of shantytown reforms, China’s real estate sales have been “successful” for a time, and developers have also aggressively expanded their scale with high turnover. “At this stage, the population situation, demographic structure, income level and the country’s guiding principles for the real estate industry have undergone major changes, and the industry has entered a new stage of development.”
Hu Rong pointed out the short-term factors brought about by the epidemic. She said that the price of real estate is still at a relatively high level, and China’s overall economic growth has slowed down. The epidemic has led to a tightening of the job market, and wages or investment income have been negatively affected to some extent. Confidence in investment spending has fallen, and burden pressure has increased. In addition, Europe and the United States are generally worried that the economic recession caused by inflation will soon come. These factors have greatly suppressed the consumption and investment demand of the real estate market, so that the current round of stimulus is not effective.
Contradiction: “Housing to live without speculation” and stimulating the property market
Since the central government relaxed its tone at the end of April, the biggest question has been, is “housing and not speculating” a thing of the past?
But at present, although almost all third- and fourth-tier cities are fully liberalizing the property market, first- and second-tier cities are still mainly making a fuss about housing that promotes rigid demand and improved demand, and still regard policies such as purchase restrictions and sales restrictions as “bottom line” “. Even the occasional breakout was immediately called off.
For example, on May 20, the Nanjing Real Estate Association announced that the purchase restriction on second-hand houses in Nanjing has been completely lifted, and both locals and foreigners will no longer need a house purchase certificate to buy second-hand houses. After a few hours, the policy was removed. Two days later, Wuhan announced that the purchase restriction policy was completely lifted in the four major urban areas. Less than a day later, the message was also deleted.
Yang Linjie, a researcher at Zhejiang University and Zhejiang Provincial Institute of Public Policy, recently wrote in an article that the policy of “housing, not speculating,” has not undergone a fundamental change, and the speculative demand has not been shaken. One of the important reasons for such persistence is that housing prices rose too fast under the speculation in the past, which overdrafted residents’ income and was not conducive to consumption expansion to support long-term economic development. The bottom line for the occurrence of systemic financial risk.
Hu Rong said that the relationship between “housing and not speculating” and stimulating the property market is very delicate. In essence, “housing and not speculating” refers to restraining investment demand, but does not exclude residents’ self-occupied consumption demand. The purpose of easing restrictions on the property market is to encourage residents to consume for their own use, but not to encourage speculative real estate speculation.
“However, housing itself has the dual attributes of consumer goods and investment targets. This makes the encouragement or suppression of these two types of demand often generated at the same time, making it difficult to grasp the effectiveness of policies that suppress or encourage.”