People’s Bank of China (PBOC), Ministry of Housing and Urban-Rural Development of the People’s Republic of China (MOHURD) and China Banking Regulatory Commission (CBRC) have jointly promulgated “the Notice on Issues related to Personal Housing Loans” on the afternoon of March 30^th, 2015. According to this Notice, the down-payment of the second housing shall be no less than 40%, but previously the requirement was no less than 60%, and no less than 70% in big cities such as Beijing, Shanghai. In addition, the Notice has stipulated that the down-payment of the first housing through public housing fund loans can be as low as 20%, and the down payment of the second housing can be as low as 30%.

Meanwhile, the Ministry of Finance and State Administration of Taxation have released notice to adjust the business tax based on the years of the holdings of ownerships. Starting from March 31^rd, 2015, individuals are subject to pay the business tax in full value if they sell the properties they have held for less than 2 years. Business taxes differentials will be levied on non-ordinary housing with holdings above 2 years. Ordinary housing can be exempted from business taxes. However, before that, only the properties with holdings of more than 5 years will be qualified for being subject to business taxes differentials or tax exemptions.

In response to these new policies, the reporter interviewed Professor Jiangang SHI with School of Economics & management, Tongji University and the Executive Director with Kingwai Real Estate Institute of Tongji University.

The new policies are not meant to bail out the market

There have been rumors at large that the government is endeavoring to bail out the real estate market by frequently releasing a series of policies supporting the development of real estate market. In my opinion, this is not true. The bailout would only come when the market is on the verge of meltdown. However, china’s real estate market is far from getting to the point of meltdown. The promulgation of these policies is to stabilize the growth, benefit more people and promote the healthy development of the real estate market.

The increase of cost of loan is only a problem on the surface

According to the new policy, the down payment of the second housing has declined but the percentage of the loans would increase. As a result, the total cost of loan would go up due to the increasing cost of interest rates, and monthly installment.

However, Professor SHI thought this was only a problem on the surface. In reality, the new policies are mainly targeted towards the middle-aged and young people instead of the elderly population. From a static point of view, the middle-aged and young people are still struggling to buy new houses. However, if we view this problem from a dynamic point of view, the middle-aged and young people can handle the newly added cost of loan because their salaries and incomes have a high growth potential. With the increase of the employment tenure, and their income level, the month installment won’t be a big problem for them.

The new policy won’t trigger the “Sub-prime crisis”

The root cause of the US sub-prime crisis is that it has lowered the threshold to homebuyers, and properties were sold out to those who have no or weak debt servicing capability. As the new policies have lowered the threshold of purchasing properties, will it trigger a Chinese version of “subprime crisis”?

“Absolutely no!” said professor Jiangang SHI. He pointed out that the outbreak of the US subprime crisis was due to the fact that the threshold was extremely low, and zero down payments were rampant. Once the properties were sold out to the buyers, when the prices declined, the owners would stop paying the mortgage. In contrast, the lowest down payment in the new policy is 20%, and that is to say only when the price declined by over 20% would we see the Chinese homeowners start to stop the mortgage payment. China’s real estate market has already gone through the initial transitional phase and is now stabilizing and 20% decline won’t happen. Besides, Chinese government won’t allow it to happen anyway.

Now a few real estate developers are providing down-payment loans to the homebuyers, and make the entire home buying process “zero down payment”. However, the interest rate of this down payment loans is very high and could pose a big threat to the homebuyers. Relevant government agencies shall pay more attention to this situation.

Will the new policies trigger properties speculations?

The golden era of China’s real estate market is already gone and the whole market has been stabilizing. In other words, the exorbitant price skyrocketing is a thing of the past. Compared with products with a higher yield, such as securities, personal wealth management products, and equities and corporate bonds, real estate properties are no longer an attractive investment option. So the release of the new policy will not trigger property speculation.

With regards to the real restate shares on the stock market, Professor SHI thought the new policies would not trigger speculations on the real estate-related shares as the investment in shares is determined by the future yields of the listed company. The new policies might bring short-term volatilities to the real estate share market, but the share price of the real estate stock is determined by the market situation of the overall real estate sector.

“Restrictions of purchase” shall be changed into “Restrictions of sales”

Among the original 46 cities subject to “restrictions of purchase”, only Shanghai, Guangzhou, Shenzhen and Sanya have not seen the “restrictions” policy removed. According to Professor SHI, this policy has curbed the “real demand”, and it will be removed in the future. However, there is low likelihood that this policy will be removed in the short time in mega cities such as Beijing, Guangzhou and Shenzhen, because there are robust demands in these cities, and this policy could help contain the speculations.

Why this policy has contained the so-called “real demand”? Among the cities with the “restrictions” policy, buying a third house is prohibited. However, for big families with elderly parents, and young adults, there indeed is a real demand for a third house. The first house is for the homebuyers. The second is for their children for wedding purposes and the third one is for their elderly parents. If the elderly parents are economically not well off, their children would want to purchase the houses for them if it is economically viable for them.

In order to prevent speculations, the “restrictions policy” shall be changed into restrictions of sales. Homebuyers are allowed to buy a third or even a fourth house to meet their real demands depending on their family’s living conditions. However, if they want to sell their houses, and that happen to be their third or fourth houses, they have to turn in the value-added proceeds to the government. By using this approach, on the one hand, it has addressed the real demand and the government, on the other hand, can invest this value-added proceeds in the infrastructure to build more public housing.

In other words, if the policy is changed to the “restrictions of sales”, when the homebuyers are purchasing a third or more houses, they have to be aware of the fact that they have to turn in the value-added proceeds to the government if they sell them. They would not be able to pocket in any profits or expect to gain any profits from speculating on the property market. In that case, they won’t speculate on the property market.

To adjust the supply in the real estate market, Ministry of Land and Resources and Ministry of Housing and Urban-Rural Development have jointly released a “Notice on Optimizing the Housing and Land Supply Structure to Promote Stable and Healthy Development of the Real Estate Market” on March 27^th, 2015. To adjust the demand in the real estate market, People’s Bank of China (PBOC), Ministry of Housing and Urban-Rural Development of the People’s Republic of China (MOHURD) and China Banking Regulatory Commission (CBRC) have jointly promulgated “the Notice on the Issues related to Personal Housing Loans” on the afternoon of March 30^th, 2015. The promulgation of these two policies will help tackle the differences by geographies and promote a healthy and stable development of the real estate market.