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China’s Communist Party pledged this month to cut bloated property inventories as part of a wider attack against economic challenges laid out in its 2016 economic master plan.
Getting buyers into millions of empty homes, also known as "destocking" in economist jargon, would involve pulling a variety of policy levers. And even after the central bank cut the main interest rate six times since late last year to a record low of 4.35 percent, there’s still more room to lower rates, the bluntest weapon in the policy arsenal.
From ghost towns to steel mills to coal mines, policy makers are making a renewed push to deal with the supply side problems such as overcapacity and mis-allocation of resources after efforts to rev up demand failed to stem the economy’s slowdown.
After the Politburo set slimming inventories as a key 2016 task, the government’s Central Economic Work Conference may soon roll out more measures to stimulate property demand, from faster urbanization for migrant workers to easier access to housing subsidies and possibly even tax breaks, according to Nomura Holdings Inc. economists.
"Those measures may help promote property sales, especially in large cities," according to a report this week from Yang Zhao, China chief economist at Nomura in Hong Kong.
Here’s how some of those policy changes might play out next year:
1. Borrowing Rules
China’s central bank has cut down-payment requirements for purchases of both first-homes and second-homes, allowing prospective buyers to borrow more. China on Sept. 30 cut the mortgage down-payment requirement for first-home buyers in smaller cities by 5 percentage points to 25 percent. That followed a March reduction of the minimum down-payment for some second homes to 40 percent from 60 percent.
There’s still room for more cuts. From 2003 to 2010, down-payments were as low as 20 percent for first-home buyers, before it was raised to 30 percent as the market heated up. Still, policy makers may act “prudently” on further lowering required down payments as it may create financial stability risks if the threshold is cut too much, Citic Securities Co. property analysts led by Beijing-based Chen Cong wrote in a Dec. 14 note.
2. Migrant Buyers
The government also wants to help dissolve an inventory glut by giving China’s 274 million migrant workers from rural regions more of the urban-residency permits they need to buy homes in cities.
In its latest vow on Monday, the Communist Party’s politburo urged home inventory cuts through pushing migrant workers to become “urban residents,” the official Xinhua News Agency reported. Officials will push housing-system reforms tailored to the “new urban residents” as part of measures to increase home-purchase demand, Xinhua reported.
To encourage farmers to buy homes in cities, China may soon subsidize migrant workers directly, said Yang Kewei, a Shanghai-based analyst at property data and consulting firm China Real Estate Information Corp. He said county-level governments in Anhui, Sichuan and Henan provinces have started such subsidies.
Migrant workers may be encouraged to settle in cities by granting them permanent residency permits, known as hukou, with access to public services such as health care and schools, Yang said. The politburo vowed on Monday to allow more migrants to claim hukou in 2016. Beijing plans to start a new points system to allow more of the permits.
Beijing, Shanghai, Guangzhou and Shenzhen still ban property ownership by outsiders who haven’t lived or paid social securities for a certain period.
3. Cheaper Mortgages
Officials can also spur home buying by allowing buyers to borrow more from the public housing funds. Home buyers borrow at a cheaper rate than bank mortgage loans from these funds managed by local governments. Buyers applying for public housing fund loans can also take advantage of down-payment requirements as low as 20 percent, according to eased rules in March for first-time buyers and in August for second-homebuyers.
“It would be a very strong stimulus for home buyers if they can borrow more from the public housing funds, because they don’t need to repay these loans with additional cash,” said Liu Yuan, Shanghai-based research director of Centaline Group. Individuals contribute money to housing fund accounts, which are held by cities, and repay mortgage loans from these accounts. Shanghai last month sold 6.96 billion yuan ($1.08 billion) of bonds backed by public housing funds boost home sales. Analysts say other cities may follow.
Some officials have proposed setting up a national housing bank in generally the same vein as the U.S., some reports said earlier this year. U.S. mortgage-finance companies such as Fannie Mae and Freddie Mac operate under a government charter. The China Development Bank and the Ministry of Housing and Urban-Rural Development have submitted preliminary plans to set up a national housing bank, China Securities Journal reported last year.
4. State Buying
After buying stocks to stem the rout earlier this year, snapping up homes may also be an option. The coastal province of Shandong said in September it will buy smaller residential properties and convert them into public rentals, which more local authorities may follow.
"That would help resurrect market confidence," said Yao Yang, dean of the National School of Development at Peking University. "Local governments should buy more inventory from the property developers and use those idle resources by turning them into social housing."
5. Tax Cuts
Buying and selling homes can be expensive, such as a 20 percent income tax on the profits for some sales, plus additional transaction taxes. Those could be cut, with mortgage payments made tax deductible, Zhu Haibin, chief China economist at JPMorgan Chase & Co., said Tuesday at a briefing in Beijing.
— With assistance by Xiaoqing Pi, and Emma Dong