China Hits Developers With Sales Rules as Govt Takes Direct Control of Home Prices

Frustrated in its attempts to dampen demand for new housing among Chinese homebuyers, China’s chief housing regulator is aiming its regulatory might at real estate developers, as the government shows its determination to cool down an ever-rising property market.

On May 19^th, China’s Ministry of Housing and Urban-Rural Development (MOHURD) released draft regulations on housing sales management which place new restrictions on sales by developers. The rules set new requirements for permits on pre-sales of housing, and compel developers to post all housing sales information for new projects, including pricing details, on the Internet for at least ten days before commencing sales.

The central government regulations follow moves by local authorities in a number of Chinese cities to restrict pre-sales by developers in the last month. During April, some of the country’s biggest developers were punished for illicit pre-sales and individual cities have also begun cracking down on moves by developers that could be seen as inflating a bubble.

And some local governments are already going far beyond the new national rules in seeking to take direct control over how much housing is sold for in their cities.

Don’t Say Prices are Rising

The draft regulations require developers to file information on new projects with the local property bureau before beginning sales, and specifically target the spread of misleading market information which could be seen as driving up prices.

The new rules specify punishments for false information or misleading advertising, particularly the “fabricating and spreading of information on price increases which could drive up prices.” Developers are also forbidden from using buyer’s prepayments other than to deposit them in escrow accounts and from hoarding units or appearing to hoard units.

Developers which fail to properly file their pre-sale information can have their rights to sell units taken away, and any illegal gains would be confiscated, with the violators to be fined up to 500 percent of the amount of those illicit profits.

New Regulations Follow April Crackdown

In what looks like a case of punish first and legislate later, the MOHURD regulations follow less than one month after some of China’s largest developers were punished for illicit sales activities.

During April, China Vanke, the country’s second-largest developer by sales, had its sales operations in Xi’an shut down by city authorities, after the government accused the prestigious builder of violating sales regulations.

During the same week that Vanke received its punishment, authorities in Chengdu had taken action against several developers for bundling parking spaces with apartments. A week earlier, developers in Hangzhou had been penalised for providing “bonus space” to buyers of new home.

Is Kaifeng the Future for Developers?

While the central government rules provide a framework for the earlier local implementations, new rules issued last week in the city of Kaifeng could give a glimpse of the future.

On May 15^th, the government of the city in Henan province issued its own set of rules for real estate developers designed to “maintain market order and curb housing speculation to ensure stability in home pricing and the housing market.”

No Financing – No Sales

The biggest change for developers is the requirement that, before beginning pre-sales of housing, developers must prove that they have committed at least 25 percent of the total investment capital for the entire project. The builders are also now compelled to confirm dates of completion and handover for the project, as well as committing to construction schedules.

The city government’s restrictions take further aim at developers making fat profits on home sales. In Kaifeng, developers planning to sell units at 150 percent or more of the land cost for the project may apply for a presale license after the main structure of a building is completed. For projects priced at 200 percent or more of the land cost, sales can only be transacted when the homes are completed.

Make Sure That Everything is Average

The Kaifeng measures also take aim at developers’ pricing.

For initial sales of a project, developers are required to adopt the average pricing of projects of similar type and quality in the area. For subsequent sales, prices are not allowed to rise more than five percent within six months and the authorities forbid prices increases of more than 10 percent on a project within a one year period.

Developers are required to show clear and consistent pricing information, and are forbidden from adding surcharges to home prices or selling deposit or VIP cards as ways to skirt pricing controls.

Housing Bureaus to Track Prices and Enforce Rules

The Kaifeng rules establish a housing information system which requires developers to provide their pricing and sales data to the housing bureau, as well as implementing online registration for new sales records. Local housing bureaus are empowered to track average prices while enforcing the regulations and can revoke the sales permits for projects found to be out of compliance for up to two years or cancel the company’s business license.

The new rules also forbid developers from delaying the launch of new projects. Many builders, faced with government-imposed price ceilings, had keeping high end projects off the market in the hopes of selling them at a higher price once official attitudes had changed.