The runaway freight train that was China's real estate market is showing signs of slowing. But this has not eased China's top policymakers. At a State Council meeting held on January 31, Premier Wen Jiabao reiterated the government's stance of consolidating measures to curb property speculation and bring about a "reasonable" correction in housing prices.

Since this meeting was held to discuss the government work report to be submitted to this year's session of the National People's Congress in March, Wen's remarks also disclosed the Chinese Government's orientation in the real estate industry in 2012—control will continue to tighten and will not be eased for some time.

Control works

Two years ago, the Chinese real estate market was in a fever, and the fast-growing housing prices caused discontent among the public. Since April 2010 the Chinese Government has launched a new round of control measures against the real estate market, featuring curbing speculation, restricting mortgage loans and accelerating construction of affordable homes.

These policies finally achieved results. According to the 2011 loan distribution report released by the central bank on January 30, growth of real estate loan dropped. By the end of December 2011 the balance of loans granted by financial institutions to the real estate industry had totaled 10.73 trillion yuan ($1.7 trillion), up 13.9 percent year on year, which was 13.5 percentage points lower than a year earlier. In the meantime, the proportion of loans for developing affordable homes increased. By the end of December 2011, the balance of loans for developing affordable homes stood at 349.9 billion yuan ($55.42 billion), an increase of 175.1 billion yuan ($27.57 billion) for the year, accounting for 50.1 percent of total real estate loans, which was 31.7 percentage points higher than that in the outset of 2011.

In January 2012, the average home price in 100 Chinese cities was 0.18 percent lower from a month ago at 8,793 yuan ($1,393.5) per square meter, dropping for a fifth month on the monthly basis, according to a report released by the China Index Academy on February 1.

The controls have hurt real estate developers, causing some to close. According to a document from the Beijing Municipal Commission of Housing and Urban-Rural Development, in 2011 a total of 473 real estate developers did not extend their qualification certificates after expiration or nullified their business certificates, which meant all these real estate developers disappeared from Beijing's real estate market.

At present, the number of real estate developers in Beijing with valid qualifications is about 3,000. According to figures from the Beijing Municipal Bureau of Land and Resources, in recent years less than 200 pieces of land were supplied to developers on average each year, and it is estimated that supplies will likely diminish in the future. In the next five years, there may be only 1,000 property developers who can obtain land, which means the other 2,000 will have no land to develop.

Other cities face similar problems. According to figures from the Housing Security and Management Bureau of Wuhan, capital of Hubei Province, by the end of October 2011, there had been 1,375 registered real estate development companies in the city, a decline of 200 compared with the same period in 2010.

Control continues

The Ministry of Housing and Urban-Rural Development (MOHURD) is constructing the national housing information database. Individual housing information in 40 key cities such as Beijing, Shanghai and Hangzhou, capital of Zhejiang Province, will be entered the MOHURD database by the end of June. After that, housing information in the 40 key cities will be available for inquiry and home purchases in the above cities will be under uniform monitoring.

This means speculators will be subject to more strict restrictions. Zhang Dong, Director of the Institute of Real Estate of Zhongnan University of Economics and Law, said in his blog that with a national database of individual housing information, the supervisory authorities will be able to master more exact and timely commercial house planning and data of market supplies and demand, implement effective monitoring and formulate effective control measures.

MOHURD is also accelerating construction of affordable homes. The target for this year—7 million units—is lower than the 10 million units in 2011, but the actual construction area will be larger than last year.

Property tax is also likely to be introduced in cities with large investment proportions, or in the 40 key cities entered in the individual housing information database. On January 28, 2011, Chongqing and Shanghai became the first two pilot cities for property tax in China. After one year, the effect of this tax has been seen in Chongqing, with high-end housing consumption and the rapid rise of housing prices being curbed and the structure of housing supplies being optimized. People's concept of housing consumption has also begun to transform.

Chen Guoqiang, Vice President of the China Real Estate Society, said the regulation this year will continue to focus on curbing speculative investment, and the duration of controls will be decided by macroeconomic development and operations of the real estate industry.

Li Huiyong, a macroeconomic analyst of Shenyin and Wanguo Securities Co. Ltd., said in 2012 China will further improve the structure of the real estate market based on the regulation experience last year and consolidate regulation effects.

Wu Qilun, an independent financial commentator, said the focus of real estate control this year should be government responsibilities. According to Wu, real estate control can achieve effects not only through the proper regulation policies by the Central Government, but also effective implementation of the measures such as purchase limits and credit limits by local governments. "However, we have seen that some local governments are trying to figure out how resolute the Central Government is in enforcing regulatory measures, with some news of loosened purchase limit being released in some localities," Wu said. "Therefore to consolidate the effects of real estate control, the Central Government will inevitably strengthen supervision on local governments to fully implement the regulation measures and sternly prevent any local government from loosening the controls."

Wu said this year China should continue to push local governments to build affordable homes, formulate an accountability system of real estate control and punish administrative officials and officials in charge of the real estate industry in localities that fail to realize the target of controls.

Future trends

"It is unlikely that real estate loans will grow rapidly this year, and real estate credit will be tight," said Zhu Daming, Vice Chairman of the National Real Estate Manager Alliance under the All-China Federation of Industry and Commerce.

Zhu said the reason for the tight credit in the real estate market this year is that property prices have reached a peak, and it is unrealistic, at least in the first half of this year, to reverse the market just relying on purchasing power when there is no strong growth of new real estate loans.

According to Zhu, although growth of total real estate loans is dropping, the proportion of loans for affordable housing development will rise. Growth of affordable housing investment will pressure developers of commercial housing to bring about a reasonable correction in housing prices.

According to a report recently released by the Center for Forecasting Science of the Chinese Academy of Sciences, in 2012 the average property selling prices are estimated to drop 5.3 percent year on year.

The banking industry is also concerned about property price declines. At a central bank conference on risk management against the real estate industry held at the end of November 2011, a report written by the central bank's statistics and analysis department was discussed, which said property prices will begin to drop with slowed growth of both real estate development investment and newly granted loans. The report said some representatives from commercial banks thought banks and real estate developers could stand the impact of a 20-30 percent decline of property prices, but what the central bank is more concerned about is whether panic selling and other chain reactions will be induced.

Web link: http://www.bjreview.com.cn/business/txt/2012-02/13/content_424924.htm