Home > Alumni Views > Alumni Views | ZHAI Ting: Shanghai Real-Estate Market Analysis and Housing Strategy 2019

Alumni Views | ZHAI Ting: Shanghai Real-Estate Market Analysis and Housing Strategy 2019

Mon, Oct 26, 2020

Published by Tongji SEM Alumni Association December 6, 2019

The article was transferred from the WeChat account Modu Xiaomonv, author Modu Xiaomonv

ZHAI Ting

Class of 2012, Master of Finance, Tongji-Case West Reserve University MBA

Double Degree Program Alumni

Council Member of the Tongji Alumni Entrepreneurs Association

General Manager of Shanghai Yuexuan Real-Estate Consultant Co., Ltd.

Ms. Zhai has worked in Shanghai real-estate market for more than 10 years. She has previous working experience in a major property developer, and achieve sound results in land procurement, marketing planning, operational management, and strategy development. She is well versed in the land market, new home marketing, and stocking-house in Shanghai.

In September 2018, Ms. Zhai and her team submitted the business model “Customized Housing Management Service for High-Net-Worth Clients” to the Tongji Entrepreneurship Fund for review. The business model passed the review and was given initial funding accordingly. She started the Shanghai Yuexuan Real-Estate Consultant Co., Ltd. in October, and registered the company in the National Science and Technology Park of Tongji University.

This article was transcribed from Zhai Ting’s speech in alumni salon of June 2019, originally titled “Shanghai Real-Estate Market Analysis and Housing Strategy 2019”.

Hello, everyone! I’m Zhai Ting, Class 2012 of the Tongji- Case West Reserve MBA program. I appreciate being invited by the University and my teachers to visit alma mater, and today I am going to share with you some perceptions of Shanghai’s real estate market.

Today, we are going to cover a couple of topics: Shanghai’s policies on restricting house purchases, Shanghai’s mortgage policies, the current situation and development trend of the market in 2019, the determining factors of housing price, and appropriate housing strategies for individual families.

Shanghai’s Housing Restrictions and Mortgage Policies

It is not easy to buy a house in Shanghai. The buyer must meet the criteria as laid out in local restriction policies.

The housing restriction policy was first introduced in 2011: 1 unmarried person with Shanghai residency can buy 1 house, 1 family with Shanghai residency can buy 2; married couples with non-Shanghai residency but have paid social security for more than 1 year can buy 1. The policy tightened up gradually, in 2016, the requirement for social security payment extended from 2 years to 5 years or 60 months within 63 consecutive months.

Policies were laid out in just a few words, and various obstacles emerged when it came to actual execution. The situation is especially complex for Shanghai families. Can newly married couple still purchase their own house if they already co-owned houses with their parents? If both spouses have the same situation, the solution could be even more complicated. Another question maybe, if the newly married couple was both non-Shanghai residents, but the husband received Shanghai residency first while the wife is still waiting, can their purchase be counted as the first housing in Shanghai? The answer to these questions varied from district to district.

Let’s look at mortgage policy. Shanghai is implementing the most stringent policy right now, which means previous ownership and previous mortgage record will both be counted. Mortgage record means a nationwide background check on the buyer, if you have a previous mortgage record, the new purchase will still be counted as the second house even if you have settled the previous mortgage, or even if you have sold the old house.

If it’s your first purchase, the down payment will be 35% of the total price. If it’s your second purchase, then the down payment ratio will be either 50% or 70%. How to determine if you should pay 50% or 70%? It depends on whether the intended purchase target can be classified as regular housing. In simple terms, the total price of the house must be no more than RMB4.5m if it’s located within the inner circle, no more than RMB3.1m if it’s in between the inner and outer circle, and no more than RMB2.3m if it’s beyond the outer circle for it to be classified as regular housing. Only a handful of extremely small-sized apartments may fit these criteria, and the rests are far above. In other words, if you buy a second house today, you are most likely to pay a 70% down payment.

That is to say, if you have RMB2m ready as down payment, you could buy a house worth RMB6m if it’s your first buy, but you could only buy a house worth RMB2.85m if it’s your second buy. If you are thinking of buying a two-bedroom apartment, that could mean the difference of a house in the mid-circle or a house far away from the outer circle. We see from this example that the mortgage policy, or the leverage ratio, is critical to buying a house.

In terms of mortgage records, the background check is conducted on a family basis on a nationwide level. For example, if you have taken mortgage loans in your hometown, then it will appear on your credit report, then the Shanghai purchase will be counted as your second house. It will remain so even if you have sold the old house.

Current Market Situation and Future Trends

We need to retrace our footsteps to 2008 for a complete real-estate market story.

The world economy took a downturn in 2008, the sub-prime mortgage crisis broke out in the US, Lehman Brothers went bankrupt, even Fortune 500 companies such as GM filed for protection, and the world economy is crying for help. The Chinese government intervened and imbued the market with RMB4trn liquidity. The most favored theory in the real estate market is the Price-Turning-Threshold theory, and it was backed by many property tycoons. Vanke took the lead to the lower selling price to grab more market share.

In 2008, the mortgage policy does not specify how many houses you already own, how many mortgages you have taken. The purchase is always a 20% down payment with a 30% discount on the mortgage rate. I still distinctly remember an older sister coming to our sales outlet and buying her fourth house. She paid a 20% down payment, enjoyed a 30% discount on the mortgage rate, and all four houses are bought with mortgage loans.

The 4 trillion bailout money made its impact and the real estate market started to recover in 2009. In the Spring of 2010, a 30% mortgage rate discount was canceled, but it failed to stop the rise of housing prices.

In January 2011, the restriction policy came out. Initially, there are still many loopholes that people can exploit, but they are gradually fixed. The market cooled down quite swiftly. In 2013, the requirement for social security payment extended to 2 years.

Then we encounter the period of the Spring of 2015. I believe most Shanghai people still have sharp memories of the rapid rise of housing prices in 2015-2016. The price of a house could raise by RMB500000 overnight. The demand for housing upgrades by mid-to-high income families was the drive for this increase.

What’s the key point for this so-called Policy 330? At that time, this policy does not require a check on previous mortgage record, all deals are conducted with 30% down payment. For example, suppose that you own a house worth of RMB2m, then you will be able to purchase a house worth of RMB6m if you sell the old house and use the money as a down payment. If you do the same transaction today, you will only be able to afford a house worth of RMB3m. Many house owners upgraded their houses in that period. That is the reason their person asset doubled so quickly.

To rein in the rapid growth of housing prices, the requirement for social security payment was extended to 5 years in March 2016. However, it exerted little impact on the real estate market. The market price of housing kept rising fast.

On November 29 of that year, as I recall, it was a little past 9 pm, the government issued new restrictions, stating that when taking new mortgage loans, previous ownership and mortgage records will be counted, and the down payment ratio has been raised to either 50% or 70%. In reality, most houses on the market would require the buyer to pay 70%. The market cooled down in response to the new restrictions. What happened since should be no news to you all. The housing price dropped in the past two years, and the number of deals remained low. In September and October of last year, the real estate market fell to its lowest point. By tradition, September and October are golden months for property transactions, but last year, it recorded the lowest trading volume since 2016.

The market recovered somewhat since the New Year holiday of 2019. Personal income tax reform helped with the recovery. In March and April of this year, the market underwent a moderate booming cycle. The average number of monthly traded second-hand houses reached 26,000 units. In the past three years, the same index was only around 10,000 units.

Everyone is concerned with the future price trend. Will the housing price keep on rising or will it take another dip? With reference to our analysis of the real estate market in the past few years, I believe you will find the determining factor for housing price is mortgage policy rather than restriction policies. House buyers are genuinely concerned with how much down payment they will have to pay.

The price boom in March and April was driven by two types of housing demands. The first type is people buying their first house, with the price range at RMB2.5-3m and locations concentrated in the suburbs. The second type is people buying school district houses. Shanghai introduced the “Common citizen enrollment policy” in 2017, and we saw a clear surge for school district housing afterward. School district housing is used in two different ways, some buyers just register their Shanghai residency at the house and then sublet the house to others, while some buyers actually live in these houses. These two types of housing demands would only have a limited impact on the market price of houses.

Let’s do a quick review. The price rise of 2015 was driven by mid-to-high income families. At present, it is difficult to replicate the exact conditions for the price to rise. Given the current housing price, it will be equally difficult for mid-to-high income families to upgrade their houses again. A quality three-bedroom house would cost around RMB10m, 40% down payment equals RMB4m, 50% is RMB5m, and 70% is RMB7m. It’s difficult for people to pay the remaining RMB2-3m in cash. If the buyer took RMB2m in the mortgage loan, then the monthly payment would be around RMB10000, still affordable for most families.

Therefore, our opinion is that the price rise of 2015 will not repeat itself unless the mortgage policy loosens up. At the same time, housing demands are not retreating, the real-estate market would not be as gloomy as the past few years. In a nutshell, this will be another year for mild recovery.

Determining Factors for Housing Price Trends

1 Condition of the Economy and Government Policies

Everyone knows that the real estate industry is a pillar industry for China’s economy. It is tied up to various upstream and downstream industries, and it is vitally important for the nation. Its development was most obviously intervened by government policies. Every fluctuation of housing prices can be tagged with a change in industrial policies.

At present, the State government makes different housing policies for first, second, and third-tier cities separately. Adjustment and control policies for first-tier cities are mostly stable. In terms of Shanghai’s local policies, it has created a moderately rising market, meeting the government’s expectations. It is unlikely that Shanghai will loosen or tighten up its local policies any time soon.

2 Market Supply and Demand

Policy aside, the determining force for houses within a certain geographical area would still be basic market laws, provided that government policies remain stable as it is right now. New houses are subject to more restrictive measures, and the adjustment and control measures would generate more impact on second-hand house deals.

For example, what does houses in Tangzhen in the outer circle cost so much? The answer lies in purchasing powers in the near vicinity of Tangzhen. Tangzhen is close to Zhangjiang, it’s around 10 minutes’ drive away and can also commute via subway line 2. Pudong District has a couple of economic driving centers, and Zhangjiang is one of the important ones. Many mid-to-high income persons live in Zhangjiang, and this area lacks residential compartments since it was meant to be a technology park, not a residential area. Real-estate developments in Zhangjiang are expensive, people who work in that area may not be able to afford housing in the same area, and Tangzhen offered them an affordable solution.

3 Regional Development Plans and Policies

Caolu is also close to Zhangjiang, but why does this area cost much less than Tangzhen? The answer lies with another important factor—regional development plan and policies. Tangzhen is positioned to become a high-end international community, and Caolu is positioned as an area for relocation of local residents. Developers in Tangzhen are well-known enterprises such as GreenTown and Yanlord Land. House prices rise when the projects are built by leading developers.

Understanding these determining factors is crucial to our selection of housing locations.

Housing Strategies and Implementation Roadmap

We have reviewed a couple of very important determining factors for housing prices on the macro level. What kind of housing strategy should we employ? Looking at the vast Shanghai area, where should we make our first move?

We need to familiarize ourselves with the “Quality Community” concept. A typical quality community requires several elements to be existent at the same time: location, cluster, complements, and refinance capability.

Location. It is the most important element when we talk about houses. The division of Shanghai’s geographical areas has moved beyond the inner, middle, outer circle approach. In my opinion, it is crucial to buy houses close to concentrated purchasing powers. As we mentioned earlier in the Tangzhen example, the location is well outside the outer circle, but it is close to Zhangjiang, a place with concentrated purchasing power.

Cluster. One quality compound surrounded by low-quality compounds is difficult to make a joint impact. It’s important to have similarly high-quality compounds all around.

Complements. Beside complementary facilities for daily life, the more important complementary element is the school district. People’s demands for school district houses are through the roof.

Refinance capability. A house comes with capability for people to live in, for the owner’s children to go to school, yet its refinance capability is equally important. Faced with a 70% down payment, any person would feel the enormous pressure, and at such a moment, the refinance capability of the house is evident. We could use the house itself to secure more millions of funds, reducing the pressure on the down payment.

To sum up my opinion, I recommend that you buy into locations or communities that meet the criteria set out above. I recommend buying houses in communities that have the potential to become a quality community. With such houses in hand, you will be well-positioned to enjoy the rising price or be at ease to upgrade.

 

X Thank you for your interest in Master of Global Management, Tongji University!