The House Restriction in China

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Introduction

Home prices surged in many cities in China over the last few years. Part of the reason for the surge has been an increase in population in the cities. This increase is due to a rural to urban migration trend, as people seek better work opportunities in the cities. The huge population has affected markets for real estate in the cities. Houses have become very expensive, as supply lags behind the rapidly increasing demand. Moreover, houses are seen as status items for the Chinese, and they provide a measure of value for households. Many Chinese people still prefer to store their wealth in houses for their historical reliability and protecting the principal investment.

Meanwhile, the gap between the rich and the poor has been increasing at a non-sustainable rate. Rich people are increasingly getting access to investment opportunities that allow them to become richer and lockout the low-income earners from similar investment opportunities. In the housing sector, the richer households and individuals are the main purchasers of houses. They get access to funds that allow them to speculate the market and earn substantial returns for second and third homes that they own. The Chinese government came in to remedy the situation by directing city authorities to come up with laws that prohibit the purchase of homes for second and additional time buyers. The policies also sought to redirect local authorities’ attention to the provision of legal and physical infrastructure for the provision of affordable housing.

China initiated a number of social policies to reduce income inequality, which mostly worked to increase the incomes of people living in rural areas. However, the social reforms have not been enough to deter people from migrating to urban areas, where there are better job prospects. In addition, the market forces in the housing sectors of the cities have increased the visibility of the sector as a lucrative area for investment, which ends up attracting wealthy people into the business. Their main aim is to buy and rent out properties or hold them in anticipation of value appreciation.

What is the house restriction of China?

The house restriction of China is a government policy that prevents citizens from buying more than one house for speculative reasons. The house restriction, also called home purchase restriction, seeks to ensure that there is equitable distribution of housing demand in the market and is a form of government policy regulation of the growth of the real estate sector in China. Housing restriction is a policy that is temporarily enforced by city authorities to ensure that property markets grow at a controlled rate. The restrictions are crafted by city authorities based on the guidelines of the central government to ensure that China does not become a victim of a housing crisis that can jeopardize its economic growth. In this regard, the house restriction of China has mainly just been a prohibitive policy, but it has not prevented the absolute purchase of second or third homes. Individuals who have cash can still buy a second home (Riley par. 1-3).

In what area is it executed?

The restrictions were executed in the financial institutions that were responsible for providing financial assistance to people willing to buy houses. Geographically, the restrictions were executed in major cities around China. Beijing and Shanghai are the main cities that still hold considerable forms of restrictions. They happen to have the most vibrant real estate markets in the country and attract the highest buyer and sellers’ attention in the sector. The restrictions also work with an individual’s status of residence. Individuals have to fulfill the obligations of their residence status before they are able to purchase homes. In general, the restrictions only deal with issues that local and central authorities cannot control in the medium term using institutions that are under them.

In 2010, the policy was executed in local governments that enforced restrictions on the purchase of second homes. Thus, the cities were responsible for executing the restriction orders in their jurisdictions, and they only concerned the purchase of second homes or additional homes after the second homes (“China’s Property Market” par. 8-9). The actual policies enacted by different cities varied according to the needs and opportunities for implementing policies. The home purchase restriction was a command and control type of regulation that affected the housing market. Its execution remained restricted to the housing market and within the developed sectors of China. It did not affect companies that were buying or constructing homes directly. Instead, it sought to tackle the rise in speculative demand driven by individual purchases. Thus, the policy was executed at a micro-level of the economy to affect consumer demand, rather than industry or sector-wide demand.

What are the details of this restriction?

The key details of the home purchase restriction are the prevention of new home purchases by families that are not residents of a particular city. In Beijing, non-Beijing registered families could not purchase second homes in Beijing when the restrictions were in place. Meanwhile, the registered families that already owned an apartment could still buy another apartment. The second apartment would be their limit. The restriction prevents the purchase of a third and any additional homes. The rules work such that no family can end up owning more than two properties to prevent the family or a group of families dominating the housing market in Beijing. The details of the restriction are meant to limit the demand by directly crippling the ability of people to buy houses (Riley par. 1-5).

At the same time, some of the rules require the municipal governments across the major cities to arrange for the allocation of more land for the construction of affordable apartments. It encourages municipal governments to make laws and allocations for developing low-cost housing units that are subsidized and targeted at low-income families. Moreover, single people cannot purchase homes in addition to what they already own. The same restrictions apply to people who have not paid their taxes and social security in the past five years prior to applying to buy a home (Fenton par. 1-5).

Why was this restriction published at this time?

The house restrictions or home purchase restrictions (HRR) appear at this time because the Chinese government is aware of the effect of the subprime mortgage crisis that caused a final meltdown in the United States (Liu 2). China’s government does not want to jeopardize its economic growth. It has decided to regulate the housing market as a way of ensuring there is no housing bubble. The restrictions come at this time because the property prices have been escalating in major cities in China. Part of the escalation is due to speculative buying and holding, which do not contribute substantially to the housing deficit that the country faces in most urban areas.

Home prices have soared too high, which has necessitated government intervention to ensure that a majority of the Chinese citizens who need to buy homes have the ability to do so. Moreover, China is facing its highest rate of rural-to-urban migration; thus, it has to ensure that there is sufficient accommodation in urban areas. One way to do this is by sustaining the affordability of houses. Therefore, the government opted to introduce home purchase restrictions. The government and major housing sector stakeholders are in favor of the stabilization of housing prices to ensure that it reflects the market fundamentals of demand and supply. The existence of a high-income inequality in China is also another reason that compels the government to provide a balance in the housing sector to prevent the rich from exerting too much influence on the property market at the expense of the middle-class and low-income households (Fenton par. 3-7).

How was this restriction executed?

The central government allowed local government to execute their restrictions in agreement with property developers and other stakeholders in their jurisdiction. The localized response allowed each region to have restrictions that favor the sustainable growth of its real estate market.

Buyers faced increased hurdles for purchasing second homes. For example, in Beijing, they were required to come up with a 60 percent down payment for their second homes. At the same time, authorities prevented financial institutions from providing loans to individuals who wanted to purchase their third homes. Restrictions meant that residents who did not have a family could only buy one home. In addition, the cities implementing the restriction introduced a compulsory and a punitive capital gains tax on income earned in property sales as a measure of curbing speculative buying and selling (Riley par. 5-6).

The government of China owns urban land. It plays a dominant role in controlling and handling the housing supply, demand, and finance for the real estate sector. Authorities use land supply, access to credit, and permission to purchase properties as a mechanism for cooling the markets or stimulating them. Meanwhile, the population in the Chinese cities includes registered residents and unregistered residents. The numbers help the authorities determine the price-to-income ratios and the price-to-rent ratios of the real estate market of a particular city. These indications tell whether there is going to be an unsustainable increase in prices and supply of houses beyond what the actual population in cities can sustain. As authorities monitor the indicators, they introduce a number of policies to shift demand.

An example of a policy used is the limitation of lending to second or third time home buyers. This limitation creates a dip in demand and forces the market to autocorrect home prices. In addition, the rules require locals to have lived on the mainland for a year. In addition, after buying the property, the new owners are required to live in it and not rent it out as an income-generating asset. This restriction prevents individuals from buying homes in the hope of having tenants help them pay for their homes. Under the arrangement, only people who need homes to live in will go ahead and buy a house (“China’s Property Market” par. 10-13).

What is the advantage and disadvantage of this restriction?

One advantage of the restriction is that it prevents speculative buying of houses. Therefore, it helps to keep the housing sector stable with predictable prices. Before the restriction, many people rushed to buy houses because they saw housing as a quick way of making a profit. Therefore, they bought houses only for speculative purposes. This behavior distorted market statistics, showing a high demand that was causing an increase in prices. However, this demand was artificial and short-lived. It would not sustain an increase in supply in the end. In this regard, the restriction works to prevent a bubble in the real estate sector of the country.

The population of buyers had become irrational and forgotten the use of market fundamentals. The restrictions induced a slump in demand and caused most developers to drop housing prices. As a result, many buyers realized they had bought overpriced units and became less willing to continue doing so. The restriction helped to correct the market and deliver true price equilibrium (Noble and Wildau par. 7).

One disadvantage is that the Chinese property boom has ended, and the real estate sector is facing a slump. As the government keeps on implementing measures to reduce the rapid increase in house prices, the overall real estate prices keep on tumbling. As a result, the sector could become less lucrative for new investment. Reduced investment can lead to severe shortages in houses and cause a rise in prices that would be driven by a shortage of supply. This result would be the opposite of what the government is trying to achieve.

What is the influence of this restriction?

The restriction has caused a significant number of potential homebuyers to consider other investment options. Many of them are opting for the shadow banking system, where they are capable of earning double-digit returns on investments that appear more stable and guaranteed compared to the real estate (Noble and Wildau par. 1-7). In 2014, the year on year prices of homes rose by 4.72 percent in the year 2014, but the figure does not provide the real picture. In reality, month on month or quarter on quarter fluctuations in home prices show that many investors are facing a gloomy future in the short run.

The prices of homes went down by 0.8% in most cities in China in the year. This followed a month on month decline of “0.5% in June and 0.3%” in May for the year 2014. The purchase restrictions in Shanghai, one of the major cities in China with a large real estate market, led to the slow pace of increase in second hand prices since 2013, as of July 2014. A similar change happened in Beijing, where the rising prices of second hand and first-hand houses slowed sharply (“China’s Property Market” par. 4-6).

In the capital city, the quarter on quarter prices reduced by 2.33 percent in the third quarter of 2014. The prices had increased by 4.72 percent in the second quarter of 2014 (“China’s Property Market” par. 6-11). Construction activities in the sector are also falling because of the diminishing prospects in the real estate industry. Statistics on real estate construction show that there was a drop in the overall activity by 16.4 percent in the first half of 2014 compared to a similar period in 2013 (“China’s Property Market” par. 4-7). The overall verdict is that the demand for houses is reducing, which will affect the demand for supplementary goods and services for the real estate sector.

There were drops in the overall prices as buyers reduced their demand for housing. However, one consequence of the dropping prices was the introduction of new market incentives by developers. They began assuring buyers that they would buy back properties when prices plummeted too low for buyers to make favorable returns on their investments. Meanwhile, the government, through the treasury, eased its restriction on the purchase of second homes by reducing the upfront down payment requirement (“China’s Property Market” par. 9-13).

There is one developer company, Champs Elysées, which is even using conventional marketing strategies for consumer goods to promote the viewing of its properties in an effort to spur demand. The Shanheng Real Estate Group is one of the firms operating in the Hangzhou real estate market that provides its customers with a buyback option. Buyers who go for this alternative have their homes appreciate by 40% in case the seller buys back the house five years later (“China’s Property Market” 11-13).

What will the future social structure be after this policy?

The restrictions force investors to have two-way bets in the housing market. They have to consider run-away increases in prices. At the same time, they have to think about the slowing growth for an extended period due to macroeconomic policies or government interventions (Liu 2).

The restriction will reduce the tendency for the rich to continue owning more property relative to the middle-class and low-class people in China. Therefore, class inequalities will be reduced to some degree; however, there is no sufficient evidence to demonstrate that the reduction in inequality will be significant. A more significant social consequence of the restrictions has been the change of investment preferences in many individual investors in China. Therefore, there will be a likelihood of many Chinese investors opting out of the real estate sector or reducing their investments in the sector and looking at other avenues for investment. As a result, wealth in society will become invisible as it shifts away from the real estate sector.

A high rate of mortgage repayments will hurt the long-term prospects of the mortgage industry. Many individuals will still be put off by the high down payment requirements; thus, there will be an unlikely uptake of mortgages among the low income and middle-class sections of the society. Thus, there will likely be owners of homes coming from the high-class segment of society, while the rest of the population opts to rent. Another potential effect of the restriction, especially for the single people, will be to put off home-buying decisions until they get married (Noble and Wildau par. 5-9).

Conclusion

Under the circumstances presented above, it was necessary for the Chinese government to come up with restrictions as a way of executing its mandate to protect its citizens. The government was concerned about the growth of the sector and its effect on the economy. At the same time, it was reacting to the growing gap between the rich and the poor. The restrictions of home purchasing help to stabilize the housing market, such that returns are predictable and stable. Real estate is an important sector for China’s social lifestyle, as many Chinese people see house ownership as a status symbol. Restrictions that reduce the lucrativeness of housing can end up altering the perception of people about houses. Eventually, the policy is supposed to make the society healthy.

Works Cited

“China’s Property Market Slowing Sharply Again!” Global Property Guide. 2014. Web.

Fenton, Anna. “New Rules Complicate Buying Property in China.” South China Morning Post. 2013. Web.

Liu, Li-Gang. Is China Property Market Heading Toward Collapse? Washington, DC: Peterson Institute for International Economics, 2014. Web.

Noble, Josh, and Gabriel Wildau. “‘Return to Rationality’ Signals Big Shift in China’s Housing Market.” Financial Times. 2014. Web.

Riley, Charles. “New Restrictions Spark China Property Scramble.” CNN Money. 2013. Web.

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