Overview
China’s real estate sector experienced a “golden age” over the first decade of the century when annual investment growth stood firmly above 25% and prices were constantly on the rise. However, entering into the 2010s the market experienced a notable downturn in 2014 when prices went downhill while investment growth, albeit remaining positive, slowed significantly to just 10.5%, down nearly double from 2013. The recent adjustment is in line with the "new normal" economic course the government claims to be following, which is marked by a slower but more sustainable development. As the market was going through a rough patch in 2014, a number of issues became increasingly prominent. Property sales dropped both in terms of prices and volumes, overstocking of unsold inventories aggravated and demand faltered, especially in lower-tier cities, while access to financing was becoming tighter, all of this against the backdrop of stricter government regulations on real estate purchases targeted at rooting out corruption while making housing more accessible to the general consumers.
Government policy
In September 2014, the People's Bank of China announced its first set of relaxation measures on housing purchases since the global crisis in 2008 by introducing reduced mortgage rates and new minimum down payment levels for residential property purchases. According to the new regulations, buyers who own a home and have paid off their mortgage are to be regarded as firsthome buyers and enjoy reduced mortgage rates, with the discount reaching as much as 30% off the benchmark. Previously in such cases the mortgage rate was 10% above the benchmark.
Furthermore, home buyers in cities where buying new housing by people who already possess two or more residential properties is allowed (that includes most major cities, with the exception of Beijing, Shanghai, Guangzhou and Shenzhen) need only to repay their previous mortgage in order to become eligible for a new one. Another rule concerning mortgages brought the minimum amount of down payments for first-time buyers down to 30% of the overall price, compared to 60-70% prior to introducing the new measures. Subsequently, mortgage lending conditions were also eased for second home buyers in March 2015.
In another policy change, the finance ministry announced that sales of homes purchased over two years ago are to be exempt from business tax, which is 5.5% of the contract price.
The measures came on the back of many cities previously already having adjusted their related policies towards loosening the regulation grip on the market.
Lending rates
The People’s Bank of China entered an easing cycle starting November 2014, cutting the rates on four separate occasions since then and bringing the benchmark rate from 6% to 4.85% in a move to bring back money to some of the economy’s ailing sectors, with real estate being one of the major targets. The bank explicitly stated that the property market slowdown as well as deflationary risks were the main reason for the cuts.
Mortgage lending grew 18.3% in 2014, a somewhat lower rate than the 20.7% seen in 2013 but still securely remaining in double-digit territory. 2012 saw the lowest growth over the past ten-year period (12.8%) but the market has since returned to its higher growth levels in the neigbourhood of 20%. The recent easing in mortgage requirements is likely to spur some new demand, however, any dramatic upsurge is not to be expected as banks are not likely to make full use of the lower threshold of lending rates, keeping interests higher in order to boost profitability.