Shanghai tightens non-local homebuyer rules as prices surge

Bloomberg

Shanghai unveiled a package of measures designed to stem a surge in property prices in the metropolis, underscoring how regulators in top-tier cities are shifting gears in an economy where housing has been a brake on growth in recent years.
The local government will tighten approval criteria for non-resident homebuyers, raise down-payment requirements for some second homes and ban unregulated lending, Gu Jinshan, chief of the city housing management commission, said.
Shanghai, where new home prices soared 21 percent in February from a year earlier, becomes the first large city to tighten residence-buying requirements. It is taking advantage of greater freedom from the central government for local authorities to deal with divergent property markets across the country. In first-tier cities, stimulus intended to boost sluggish real-estate investment led to a home-buying frenzy.
Finance-center Shanghai has seen “panic buying” and phony divorces that can double a couple’s buying power, Gu said. The local market has also been affected by a inflow of funds from other regions, and from the stock market, which plummeted in mid-2015.
Shanghai will limit homebuying eligibility to those who have paid income taxes and social insurance for at least five years consecutively, up from two years now, Gu said. It also will require a down payment of at least 70 percent for second homes larger than 140 square meters or more than 4.5 million yuan ($691,000) in value, and require at least 50 percent down payments for other second homes, Gu said. That compares with a 40 percent nationwide threshold set by the central bank in March, when it loosened the requirement.
The rules, which take effect Friday, are likely to become a “turning point” for property policies in big cities, Zhou Hao, an economist at Commerzbank AG in Singapore, wrote in a note Friday. China has shifted to a more dynamic policy approach rather than a “one-size-fits-all” strategy, he said.
Shanghai officials also said they will ban home developers and real-estate agencies from offering down-payment loans, bridge loans and other unofficial lending, a practice that People’s Bank of China Governor Zhou Xiaochuan recently cited as a risk. Gu said Shanghai is examining developers and realtors and may suspend their licenses if they have violated rules.

‘Floating Capital’
“Liquidity is relatively abundant and real estate in first-tier cities has become the main destination for ‘floating capital,’” Gu said of the reasons for home-price gains that are “too fast.” “Since last year, capital from the credit market, stock market and funds in other cities have flowed to real estate.”
Even after the news, the Shanghai Stock Exchange Property Index, which tracks real estate-related stocks listed on the mainland exchange, halted three days of losses to close 0.9 percent higher Friday and pare this year’s decline to 16 percent.
Shanghai, in the Yangtze River delta on the East China Sea, is one of the world’s largest cities, with a population, at 24 million, that’s almost a third larger than it was a decade ago, according to National Bureau of Statistics data. Along with Beijing, Tianjin and Chongqing, it’s one of four direct-controlled municipalities, giving its government the same status as a province.

Nationwide Investment
The value of Chinese property sales in the first two months of this year surged 43.6 percent from a year earlier, while doubling in some larger cities. Investment in real-estate development gained 3 percent in the first two months from a year earlier, compared with a 1 percent increase throughout 2015.
Speaking at a press conference during the National People’s Congress in Beijing this month, Zhou warned banks about increased credit risk amid rising real-estate prices in the biggest cities that have begun to diverge severely from values in less-populated areas. China also faces “relatively big” downward pressure from efforts to eliminate excess housing inventory, which may suppress prices nationwide, he said.

‘Rigid Manner’
The PBOC said late Friday it asked commercial banks in Shanghai to strengthen monitoring on credit risks from mortgage loans. Lenders should decide down-payment ratio and mortgage rates “in a rigid manner” for customers who appear to be making speculative purchases, the Shanghai branch of the central bank said in an e-mailed statement.
After the Shanghai news, China International Capital Corp. analysts said Shenzhen, where new-home prices have jumped 57 percent from a year earlier, may announce measures in the near future to curb speculative homebuying. The rules will target speculators chasing profit, not buyers who want to live in the home, the analysts led by Beijing-based Ning Jingbian wrote.
Commercial banks in Shenzhen, which borders Hong Kong, were asked this week by a research unit of the central bank’s local branch to “appropriately control” the total size of home loans and set mortgage rates in a prudent manner, according to a statement obtained by Bloomberg News.
The single-city measures in Shanghai won’t have a big impact on the nationwide property market, Ken Chen, an analyst at KGI Securities Co. in Shanghai, said Friday.
For Shanghai, however, the steps are seen hurting both home sales and prices. Sales in Shanghai will weaken in the next three months, according to the CICC analysts, who anticipate that prices in first-tier cities may peak in the short term.
Shanghai sales volume may fall 28 percent under the rules, according to a report from Centaline Group, China’s biggest property agency. Non-locals accounted for 48 percent of homebuyers in Shanghai last year, while second apartments made up 24 percent of purchases.