New Measures to Douse China’s Housing Frenzy
By Zhihua Zhou

New Measures to Douse China’s Housing Frenzy

Nov. 04, 2016  |     |  0 comments

China has once again seen a housing market boom. In the first nine months of 2016, the total amount of transaction and floor space sold of commercial buildings nationwide amounted to more than RMB 8 trillion and 1 billion square meters, an increase of 41.3 percent and 26.9 percent year-on-year respectively (Figure 1). Though national fixed asset investment declined slightly from 10.4 percent year-on-year in 2015 to 8.5 percent as of September 2016, real estate investment grow by 5.8 percent year-on-year in the first nine months of 2016, up from an annual increase of only 1.0 percent in 2015.

Figure 1. Growth Rates of Some Real Estate Indicators (%)

Source: Performance of the National Real Estate Market: January-September 2016. (2016, October 19). National Bureau of Statistics. Retrieved from

The number of cities that recorded price surges also rose considerably. Of the 70 major cities monitored by the government, 66 reported price increases for newly built commercial buildings year-on-year in September 2016, compared with 21 in December 2015.

The housing boom has largely taken place in the high-tier cities. As seen in Table 1, cities with price increases for new commercial buildings of over 20 percent year-on-year include four first-tier cities and nine leading second-tier cities.

Table 1. Cities with Housing Prices Surged by Over 20 Percent Year-on-year, September 2016

Source: Housing Market Performance of 70 Major Cites: September and first half of October 2016. (2016, October 21). National Bureau of Statistics. Retrieved from

What is Driving the Latest Housing Boom?

Several factors underpin the latest market boom. First of all, the central government’s de-stocking strategy is a big contributor. The central government stated at the Central Economic Working Conference in December 2015 that it would “stimulate effective demand to reduce housing inventories” and “encourage individuals and organizations to purchase houses to simulate the rental market.” The relevant ministries and local governments implemented various policies to stimulate housing sales, including reducing taxes, providing allowances on specific purchases, lowering downpayments, and so on. These measures have lowered the purchase thresholds and entitled more households to buy.

Second, the easy monetary and cheap credit environment has boosted the development of the capital-intensive real estate industry. China’s M2 has maintained double-digit growth in the past years. In the second quarter of 2016, the balance of real estate loans and individual mortgage loans increased by 24.0 percent and 32.2 percent year-on-year respectively; and the newly-increased real estate loans and individual mortgage loans grow by 52.6 percent and 109.1 percent respectively, compared to a year ago (Table 2).

Table 2. Increases of Real Estate Loans, the Second Quarter of 2016

Source: Performance Report of China Monetary Policy: Second Quarter 2016. (2016, August 6). People’s Bank of China. Retrieved from

The five interest rate drops since 2015 have made such loans cheaper. For instance, the weighted average interest rate for mortgages of over five years was 4.55 percent in the first eight months of 2016, down from 5.53 percent a year ago.

Meanwhile, real estate developers have managed to raise massive capital from the bond market. In contrast to strict conditions applied to real estate companies on the issue of bonds in previous years, the central government released guidance in early 2015 to encourage developers to issue bonds to lower the cost of borrowing. In the first nine months of 2016, bonds issued by real estate companies amounted to RMB 960 billion, three times higher than that from the same period a year ago.

Several prestigious real estate companies have issued corporate bonds at low interest rates, for instance, bonds worth RMB 3.5 billion at an interest rate of 2.98 percent for Overseas Chinese Town in March 2016, and bonds worth HKD 3.65 billion at an interest rate of 2.50 percent for Vanke in April 2016. The interest rates of these bonds are much lower than the weighted average interest rate of bank loans (5.58 percent in the first half of 2016).

The issuing of bonds, together with huge bank loans and fast housing sales, has provided substantial capital for real estate developers. The year-on-year growth rate of capital available to real estate developers in September 2016 was 15.5 percent, up from 2.6 percent as of December 2015.

For buyers, various informal financial means have leveraged their purchases particularly in the high-tier cities. With lending from various financial institutions (e.g. financial corporations, developers, and real estate agencies), buyers can make downpayments as low as 5 percent of the total amount. This is much lower than the minimum stipulated by the People’s Bank of China, which is 30 percent for first-unit buyers in the first-tier cities. Individuals with extra cash can collaborate with those who qualify for restricted purchases to buy houses and share the gains after selling them in the booming secondary market of the first-tier cities, where purchase limitation policies apply.

Third, the declining supply and the rising price of land have pushed up housing prices in the high-tier cities. While the low-tier cities have had to constrain land supplies due to high housing inventories, the central government has put strong restrictions on the expansion of the high-tier cities. As such, land transactions in 2014 and 2015 dropped by 14.0 percent and 31.7 percent year-on-year, respectively (Table 3).

Table 3. Ground Floor Space Purchased by Developers

Source: Performance of the National Real Estate Market: January-September 2016. (2016, October 19). National Bureau of Statistics. Retrieved from

Developers, with easy and cheap money, have quit the depressed markets of the low-tier regions and actively bid on land pieces in the high-tier cities. By August 24, 2016, 300 land parcels with a price of over RMB 1 billion were sold in 2016, in contrast to 150 cases in the first eight months in 2015. Developers paid more than double for 150 pieces of land, much higher than the 6 cases in the same period a year ago. Despite the decline in land transactions by 6.1 percent in the first nine months of 2016 (Table 3), the land lease fees amounted to RMB 2.33 trillion during the same period, an increase of 8.2 percent year-on-year.

Last, housing demand remains strong in the high-tier cities. In the past two decades, many high-tier cities have registered fast population growth. With a better economy, residents have strong desires to upgrade their living conditions. Meanwhile, China has seen widening income inequality. Lacking in alternative investment opportunities, the rich, most of whom live in the high-tier cities, are very keen on housing purchases. The recent stagnation of the stock market has further underpinned speculation in the housing market.

Social and Economic Impacts of the Boom

The housing boom has helped to keep year-on-year GDP growth at 6.7 percent in the third quarter of 2016. China is still relying heavily on the traditional housing-led model to juice the economy. This may affect the leadership’s efforts to transform the economy from the investment-intensive, housing-led, and export-reliant model to one based on innovation, consumption, and services. For instance, large spending on housing could restrain households’ consumption in other sectors.

The fever could also come at the expense of the stagnation of other industries. Given the current sluggishness of the overall economy, banks prefer lending to the relatively prosperous real estate industry. In August alone, 56.5 percent of the newly increased loans were lent to households for housing purchases. Without support from the banks, enterprises in other industries are unable to invest. This is particularly the case for those in the private sector. Official data shows that private fixed asset investment declined from 10.0 percent year-on-year in 2015 to 2.5 percent as of September 2016.

With huge bank loans to the real estate sector, the banking system has become highly dependent on the prosperous yet unstable real estate sector. In the first half of 2016, real estate loans comprised 23.6 percent of total loans. Bank loans pledged by land pieces increased from RMB 0.86 trillion in 2003 to RMB 9.51 trillion in 2014. As such, declines of land and housing values will inevitably affect the banks’ balance sheets.

The fever has further polarized housing markets across China. While many low-tier regions are desperate to reduce their rising volume of inventories, speculation and unaffordability have become major problems in the housing markets of the high-tier cities. Indeed, the de-stocking measures have boosted housing prices in top-tier cities where the inventories are actually not high, but with little spillover in lower-tier cities, as the economy’s revival in such regions could be the most effective one to attract population inflow and boost housing demand, instead of leveraging housing purchases.

The housing fever could also exacerbate income inequality, class stratification, and social discontent. The price surges make homeowners richer though increases of their property values, and at the same time they raise the bar of market entrance for low-income households. The expensive housing has also downgraded the lives of many homeowners in the high-tier cities, who now spend over half of their monthly incomes to service their mortgages.

Despite of the negative impacts, the housing fever has seemingly created a win-win situation for the stakeholders. The boom has brought local governments more land revenues to facilitate regional development. Banks welcome prosperous housing developments to guarantee their business operations. Urban homeowners, who present over 85 percent of the urban population, are reluctant to see housing price drops and the shrinkage of their household assets. Indeed, housing in China has been served as a tool by the government to command the economy, and a target for speculation by the rich to accumulate their wealth.

The central government is facing the dilemma of driving growth while preventing the housing market from overheating. The housing boom is seemingly an outcome of the central government’s strategy to sustain growth against the sluggish economic climate. This helps explain why the cooling measures came out in end-September, nine months after the heating up of the housing market.

Initiatives to Curb the Housing Fever

Rigid tightening policies were finally launched to temper the markets around the first week of October. 22 cities with price surges in the past months have initiated purchase-limitation and credit-restriction measures, which were largely abandoned last summer. Cities like Shanghai, Nanjing, and Hangzhou halted land supplies or set ceiling price in land bids.

On October 6, the head of the People’s Bank of China stated that the bank would exert certain control measures over credit growth. One week later, the People’s Bank of China organized a meeting with 17 major banks to discuss credit controls in real estate sector.

The Ministry of Housing and Urban and Rural Development organized a video meeting on October 14 with regional agencies to discuss regulating the market for healthy housing development.

Such tightening measures had an immediate cooling effect on the market. According to the National Bureau of Statistics, in the first half of October, 4 cities had drops of housing transactions by 60-80 percent, 3 by 40-60 percent, and 3 by 20-40 percent, compared with the second half of September. All 13 cities with price surges of over 20 percent year-on-year as of September (see Table 1) recorded slowdowns of price growth by 1.0-3.7 percent month-on-month.

Further market deterioration is expected in the coming months, which will inevitably affect economic performance in the fourth quarter, given the significance of the real estate sector in the overall economy.

Price decreases nationwide are unlikely. While housing prices in the central areas of the first-tier cities and some second-tier cities might continue moderate growth, markets in low-tier cities with oversupplies could remain stagnant. China’s strong housing demand will prop the market. Loose monetary policy will continue to inflate housing prices, as it has in past years. Indeed, past housing policies targeted at market stability and sustainability, rather than price drops.

A national housing crash is unforeseeable in the near future and the housing boom is not yet going to be a serious trigger of macroeconomic crisis. Given that the boom is a result of some internal and controllable factors, as discussed earlier, it is believed that the government will still be able to pull the housing sector back on track.

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