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UPDATED: May 6, 2010
Taming the Real Estate Market
Curbing housing prices will rely on the effectiveness of the latest government measures
By LAN XINZHEN
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COOL DOWN THE FEVER: Construction progresses on a real estate project in Zhengzhou, central China's Henan Province. New regulations on real estate may be a turning point for the market (ZHU XIANG)  

Sales offices for housing projects are no longer enjoying the overcrowded showrooms of prospective buyers. Agents of second-hand houses have resorted to canvassing clients by making repeated phone calls, only to see transaction volumes drop further, while Chinese home buyers wait with money in hand to see how the current housing situation plays out.

This turn of events in China's housing market began on April 17 after the State Council issued a circular to curb the excessively fast growth in real estate prices in some cities.

The circular contains just 10 articles, but the regulations are harsh in terms of government supervision, financial policies, transaction taxes and fees, land transactions and housing supply. The circular has been deemed the harshest effort of regulating the real estate market in China to date.

China's real estate market might be the hottest in the world. Since 1998 when the country reformed its mechanism of house supplies, house prices in China have surged. Particularly after the outbreak of the global financial crisis, the Chinese real estate market still maintained a high growth rate despite the worldwide economic recession and sluggish Chinese economy.

The prices that some houses have reached are now far beyond the affordability of common people. In cities such as Beijing and Shanghai, to buy a basic home, people need to spend their salaries and life savings of more than 30 years. Economists say there are extremely large "bubbles" in the real estate market—and once the bubbles break, the Chinese economy will suffer.

In March 2010, the Chinese Government issued a series of regulations on the real estate market, such as abolishing interest rate discounts for housing loans, banning reluctant sales and requiring non-estate state-owned enterprises to withdraw from the real estate market. But these measures failed to address the problem, with real estate prices continuing their upward trend.

Unprecedented measures

Investors and speculators are the major force pushing up house prices in China. Therefore, curbing the "purchasing demand for investment and speculation" has become the primary purpose of the government's current regulation.

According to the circular, for families buying a second home, the minimum down payment must not be lower than 50 percent and banks must also charge a 110-percent interest rate over the standard interest rate for second home purchases. For families owning more than two homes, the down payment and interest rate are raised substantially.

In regions plagued by markedly high real estate prices, limited housing supply or abnormal price hikes, the circular requires commercial banks to suspend loans to people who are looking to buy a third home. In these regions, non-local residents who can't provide tax returns or proof of social security contributions in the related city for at least one year will not be granted housing loans by commercial banks.

Zhu Zhongyi, Vice Chairman of the China Real Estate Association, thinks the new policy focusing on regulating irrational demand and beating speculation in the real estate market has a clear aim.

The State Council instructed land resource authorities to investigate and punish land hoarders and speculators, and restrict companies breaking the regulations from purchasing new pieces of land. It requires commercial banks to adopt strict pre-examination and post-management measures for loans to real estate developers. It also requires improved supervision over real estate transactions. Developers must disclose to the public all apartments available and their prices, and start selling within 10 days after getting pre-sale approval. The houses must be sold at the disclosed prices.

The Ministry of Housing and Urban-Rural Development will severely punish developers that fail to start selling within the required time, price homes at "abnormally high" levels, or "artificially" create supply shortages by faking sale contracts.

Local governments or departments that fail to curb the rapidly growing property prices or offer enough low-cost houses will be held responsible, said the State Council.

Besides the regulating measures, the Chinese Government also increased land for housing development. The Ministry of Land and Resources (MLR) published on April 15 its housing land supply plan for 2010. During this year, the country will supply 180,000 hectares of land for housing, 1.36 times the figure in 2009.

Among the land supplies, 77 percent will be used for low-cost homes and small or medium-sized homes, said Liao Yonglin, Director of the MLR's Department of Land Use and Administration.

This is the most severe regulation implemented in the past few years, and if effective, it will produce positive results, said Mou Zengbin, Deputy Director of Beijing Real Estate Institute of E-House (China) Holdings Ltd.

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