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China Controls Housing Market by Making Up Rules as It Goes

In February, officials in Xi’an loosened the requirements to gain a residency permit, a prerequisite to buy property in the city.

China Controls Housing Market by Making Up Rules as It Goes
A man looks out at residential buildings standing across the Jialing River in Chongqing, China. (Photographer: Qilai Shen/Bloomberg)

(Bloomberg) -- In February, officials in Xi’an, the home of China’s famed terracotta warriors, loosened the requirements to gain a residency permit, a prerequisite to buy property in the city.

Then, when data showed last month that local house prices had surged a nation-leading 2% in May, officials suddenly reversed course, ruling non-local residents needed to have at least five years of tax records or social-insurance contributions to be allowed to buy property.

The rapid U-turn and oddly precise rules highlight the vast array of policy levers Chinese authorities have at their disposal as they seek to pop housing bubbles before they inflate, while keeping the economically crucial property industry chugging along. While countries such as Australia, Singapore or the U.S. confront surging house prices with restrictions of foreign buyers, tightened loan-to-value limits or higher interest rates, China’s all-powerful Communist government has free range to fine-tune the housing market as it sees fit.

“I’ve never seen any other country have restrictions that are so detailed and meticulous,” said Chen Gong, the chief researcher at Beijing-based Anbound Consulting, which bills itself as the biggest independent strategic think tank in China. “In most nations, a market problem is fixed by the market. In China, all crucial issues are decided by the government, especially the property market.”

Given the government’s wide range of policy options, it’s hardly surprising when its efforts are successful, like keeping home prices in the biggest cities largely flat since 2016. Yet, even with such control, China has also had some failures as it over- or under-reacted to the market. A down-payment cut for second-home purchases in 2014 was unexpectedly followed by six central bank interest rate reductions within the next 12 months, fueling a 50% surge in home prices over the following two years.

China Controls Housing Market by Making Up Rules as It Goes

Another common method used to control prices is banning anyone not born in a particular city from purchasing property there. Or banning anyone who’s single or even just getting a divorce. Other restrictions center around how many apartments a person can buy: the rule is usually two if a couple are local residents, and one if neither is local.

There are also rules around when buyers can sell. In Suzhou Industrial Park -- a county-level administrative area located in Suzhou, a city west of Shanghai known for its canals, bridges and classical gardens -- you can’t flip a home within five years.

China Controls Housing Market by Making Up Rules as It Goes

Some restrictions are more subtle, from developers being told they’re pricing new projects too expensively to banks being told they’re offering mortgages too cheap. There have also been limits on the maximum prices developers can pay for land plots, as well as curbs to their fundraising ability.

It all comes down to the “fundamental difference between a free-market economy and a controlled economy,” said Henry Chin, the head of research for APAC and EMEA at CBRE Group Inc. “In China, the government can kill demand directly if it has to.”

In the first half of this year alone, 251 property-policy tweaks were introduced by local authorities nationwide, according to Zhang Dawei, an analyst at Centaline Group.

“Neither big rises nor big falls will be seen in property market,” National Bureau of Statistics spokesman Mao Shengyong said Monday during a press conference in Beijing after the release of quarterly economic data.

The aim is to avoid a repeat of Japan’s experience -- letting the property bubble flare up so much it eventually bursts. That’s paramount, considering real estate directly accounts for about 6% of China’s gross domestic product and likely adds as much as 20% given its wider influence, according to Bloomberg Intelligence.

Real estate in any economy also has a multiplier effect, feeding into consumer sentiment and spending as people buy white goods to stock a new kitchen to booking a holiday if home prices are buoyant and they feel rich.

There’s also the social aspect. Shrinking wealth, even on paper, could provoke mass unrest in a country of 1.4 billion people.

In China, when a person builds enough wealth, “the only safe bet is to put it in property,” Chin said. “You can’t possibly shake this overnight.”

--With assistance from Peter Vercoe.

To contact Bloomberg News staff for this story: Emma Dong in Shanghai at edong10@bloomberg.net

To contact the editors responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net, Rob Urban

©2019 Bloomberg L.P.

With assistance from Bloomberg