Chinese Efforts to Stem Housing Bubble Show Promise

Among the biggest worries for investors globally is the health of China's real estate market. The concern is that after one of the biggest speculative booms in history, the market will come crashing down and take the global financial system with it. Outstanding credit at the end of 2016 in the world's second-largest economy amounted to 258 percent of gross domestic product, up from 162 percent a decade earlier.

Investors can breathe a little easier. The early results by authorities to stem the speculative bubble are encouraging. After a series of trials and errors, the regulatory and monetary tightening policies that have been announced in the past six months are starting to rein in developers and speculators. Based on data recently released by the National Bureau of Statistics, new home sales by value rose 8 percent to 855 billion yuan ($124 billion) from a year earlier, the smallest gain since March 2015, according to Bloomberg News.

Since President Xi Jinping said at the annual Central Economic Work Conference in December that “houses are built to be inhabited, not for speculation,” the central government’s plan to get housing under control has been strong and clear. The consensus among decision makers is that without curbing speculative activities, driven by both home buyers and developers, the stability of the economy and the society will be endangered. Stabilizing the housing and financial markets has been elevated as a national security issue.

About 60 Chinese cities have enacted more than 150 restrictive policies on home purchases and prices since March. The new round of tightening measures target lower tier cities that have become popular destinations for speculators, who are no longer eligible to buy homes in tier 1 and tier 2 cities. For example, Foshan extended purchasing restrictions from new homes to existing homes effective on June 1, 2017.

Non-local residents won't be allowed to buy second homes without providing a record of local income tax payments. Also, local residents are not allowed to buy three or more homes in Foshan. Third and fourth tier cities are now seeing the majority of the nation’s housing transaction volume. Today, 60 percent of new home sales occur in third and fourth tier cities, compared with 13 percent in tier 1 cities and 27 percent in tier 2 cities.