Beijing Caps Home Prices to Control Demand: Mortgages

Beijing Caps Home Prices to Control Resurgent Demand
A model of the city of Beijing is displayed at the Beijing Planning Exhibition Hall in Beijing. Beijing, the nation’s third-most populous city, is the only city that enforces price caps in earnest, according to Bacic & 5i5j. Photographer: Tomohiro Ohsumi/Bloomberg

Beijing, which already has China’s strictest real estate curbs, is being forced to take additional steps to contain surging home prices as demands for record-high down payments fail to deter buyers.

The city has enforced citywide price caps since March by withholding presale permits for any new project asking selling prices authorities deem too high, according to developer Sunac China Holdings Ltd. and realtor Centaline Group. Local officials will need further tightening as they struggle to meet this year’s target of keeping prices unchanged from last year, said Bacic & 5i5j Group, the city’s second-biggest property broker.

The failure of official curbs to stem price increases in the nation’s capital highlights the government’s struggle to keep housing affordable as urbanization sends waves of rural workers into China’s largest cities. New-home prices in Beijing rose by 3.1 percent in April from the previous month, the biggest gain among the nation’s four so-called first-tier cities, and climbed by the most after Guangzhou in May, according to SouFun Holdings Ltd. They rose in each of the first five months of this year.

“As the Chinese capital, and a city widely watched for the direction of property curbs, Beijing is under a lot of pressure to tighten further as it’s still leading price increases,” said Luo Yu, a Shanghai-based analyst at CEBM Group, an advisory company that covers industries including property. “More cities may follow suit with price caps.”

Nuclear Weapons

As the nation’s economic growth moderates, the possibility of monetary tightening or a nationwide property tax -- dubbed by Societe Generale SA “nuclear weapons” -- diminishes, leaving local authorities little choice but to tighten short-term price restrictions amid a worsening supply shortage.

“If tightening in the property market is too stringent, it would impact growth,” Citigroup Inc. analysts, led by Oscar Choi, wrote in a May 6 report. China’s economic expansion slowed unexpectedly in the first quarter as gains in factory output and consumption weakened.

New-home price gains in April, the biggest since they reversed declines in November, came even after Beijing on April 8 raised the minimum down payment on second-home mortgages to a record 70 percent and banned single-person households from buying more than one residence, a response to former Premier Wen Jiabao’s urge to counter surging values.

Rejecting Proposals

Beijing, the nation’s third-most populous city, is the only city that enforces price caps in earnest, according to Bacic & 5i5j. Guangzhou and Shenzhen in the southern province of Guangdong are rejecting presale permits for some projects seen as too expensive, CEBM’s Luo said. The three cities, along with Shanghai, are considered first-tier.

In one of his last policies, Wen, replaced by Li Keqiang less than a month later, on Feb. 20 called on city governments to “decisively” curb real estate speculation after home prices surged the most in two years in January.

Beijing followed with the toughest curbs among the 35 provincial-level cities that responded with price-control targets, becoming the only region to raise the minimum down payment on second homes from 60 percent and to enforce a 20 percent capital-gains tax on existing homes, according to Centaline Property Agency Ltd., China’s biggest property agency.

Still, new-home prices in the city of 19.6 million, jumped 10.3 percent in April from a year earlier, the biggest rise after Guangzhou and Shenzhen, the National Bureau of Statistics said May 18. Prices of existing homes jumped 10.9 percent, the most since they reversed declines in December, and the greatest gain among all the 70 cities tracked by the government.

Buyer Expectations

A 156-square-meter (1,679-square-foot), three-bedroom apartment in Vanke Park No. 5, on the north border of Beijing’s central business district, has risen to about 6.4 million yuan ($1 million), according to Homelink Real Estate Agency Co. That compares to about 2.8 million yuan five years ago and about 1.2 million yuan when the project, built by China Vanke Co., the nation’s biggest developer, was first sold in 2000.

The average new home price in Beijing rose to 27,349 yuan a square meter last month, more than sixfold the level in Hengshui, a city in neighboring Hebei province, according to SouFun, the country’s biggest real estate website owner.

More than 60 percent of participants in SouFun’s online survey conducted in April expected Beijing’s new-home prices to rise further after the government’s recent curbs because a capital-gains tax on existing properties will drive up demand.

Mature Markets

“Unlike mature foreign markets, the main determining factor in China’s real estate market is not interest rates, but expectations on the market going forward,” said Liu Yuan, Shanghai-based director of Centaline’s research center. “The previous rounds of property curbs since 2005 have made it clear to the average homebuyers that simply increasing transaction costs won’t change the upward trend in home prices.”

Local governments’ measures are “much milder than expected,” and their price-control targets, mostly linked to the growth in disposable incomes, still allow price gains of as much as 15 percent, according to Citigroup. In the secondary market, surging demand for homes that qualify for exemption from the capital-gains tax has pushed their prices up by more than the new levy would cost in some regions, according to CEBM.

Only about 30 percent of demand now comes from second-home buyers, limiting the impact of the higher down payments, according to Centaline.

Root Cause

Underlying homebuyers’ expectations for higher prices is a persistent supply shortage that Bacic & 5i5j called the “root cause” for April’s price increases in the city.

The number of new homes available for sale fell by 21,406 units this year as new supply in the five months ended May 31 accounted for only 42 percent of total sales over the period, suggesting a “severe supply shortage,” Bacic & 515j said in a report e-mailed June 2. Sales of new apartments in Beijing excluding government-subsidized housing slumped 51 percent in April as buyers assessed the new curbs, Bacic & 515j said. They rebounded 6.2 percent last month from April.

While direct price intervention such as the price caps promises immediate statistical effect in slowing price gains, it also threatens to aggravate the supply shortage by delaying sales of new projects as cash-rich developers reject price cuts, according to Centaline and Bacic & 5i5j. Only 53 projects won presale permits in Beijing this year as of May 29, about half of the average January-to-May total and compared with about 150 that developers expected to open to subscription during the period, according to data compiled by Bacic & 5i5j.

Population Increase

Newly available homes were equivalent to 55 percent of housing sales in the first four months of this year in Beijing, about half of the average level since 2010, according to data compiled by Centaline to gauge whether supply is ample. That compares to 130 percent in Shenzhen and 69 percent in Guangzhou for the four months ended April 30, according to the data.

The city’s resident population expanded by 6.04 million in 10 years, more than twice the size of Chicago, to 19.6 million as of Nov. 1, 2010, according to data from China’s bureau of statistics and the U.S. Census Bureau. About 36 percent of Beijing’s residents moved in from other cities, while 86 percent live in the city’s urban areas, according to the data.

China must stick to its policy of curbing real estate speculation because the supply shortage in key cities “can hardly see any fundamental change” in the near term as the nation’s urbanization accelerates, the central government said in the Feb. 20 statement.

Beijing will suspend presale approvals for apartments whose target prices are “notably higher” than earlier selling prices of the same projects or nearby projects being sold, if the developer “doesn’t accept the guidance,” the municipal government said in a March 30 statement. Developers are finding it difficult to get approval for any 5 percent price increase, and nearly impossible for a 10 percent rise, CEBM’s Luo said.

Pushing Back

The government has been pushing back approvals for the second phase of a Beijing development that Sunac, the Tianjin-based developer part-owned by buyout-firm Bain Capital LLC, plans to sell for 38,000 yuan per square meter, compared with 30,200 yuan per square meter it was asking in September for the first phase, executives said.

Still, Sunac is not cutting prices because development costs, such as land, are rising, Chairman Sun Hongbin said in an April 22 interview in Beijing. The main reason for home-price gains is the scarcity of land, particularly in prime urban locations, he added.

Almost 30 percent of developers expected selling prices last month to rise from April, according to a CEBM report based on its monthly survey of 11 first- and second-tier cities.

Beijing on May 27 called off an auction of a residential land parcel, whose price would have exceeded 20,000 yuan a square meter of floor area and would’ve set a record for this year. Such a transaction would have triggered “market panic” that higher land costs would push up home prices further, Bacic & 5i5j said.

“The most direct, very administrative price caps are now the most important measure to damp home prices, which truly ran out of hand” early this year, said CEBM’s Luo. “They have to. Otherwise prices will keep rising, possibly at an accelerating pace, because the expectations are still out there.”

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