China Cuts Home Purchase Down Payment to 20% to Revive Market

In a surprise move to boost home sales, China’s government has cut down payment requirements for purchases of additional homes to 20 percent from 30 percent in most cities, for buyers who do not have loans on their existing properties.

All Chinese communities except Beijing, Shanghai, Shenzhen and Guangzhou will be lowering the barrier to home purchases effective September 1st, according to a statement from the Ministry of Housing and Urban-Rural Development on Monday.

The decision is the second time that authorities have lowered down payment levels this year, after a similar move in March that lowered down payments for all buyers of second homes from 60 percent to 40 percent. The spur to housing sales comes as the country struggles to maintain economic growth in the face of slowing investment and a slumping stock market.

Welcoming Speculators Back into the Market

The move to lower down payments means the government invites big-spending property speculators back into the market, after working hard to limit their influence when China was experiencing double-digit growth in housing prices.

After lowering down payments for second-home buyers in March, China experienced a surge in home sales, and housing price growth moved into positive territory in April after a year-long slump, according to figures compiled by Mingtiandi from government data.

The government had raised down payments for buyers of additional homes to 60 percent in 2013, after boosts in interest rates and other home purchase restrictions had failed to cool a raging housing market.

Working Hard to Rekindle Housing Demand

Lower down payments in China’s second and third tier cities (as well as in smaller communities) could boost demand in those areas and help developers clear ballooning inventories of unsold homes.

Throughout the last four months of recovery in the housing market, the country’s biggest cities have usually led in terms of sales volumes and price growth as urbanisation and the growth of China’s service sector has fuelled demand for housing in the first-tier cities.

By contrast, many smaller communities are still struggling to sell off housing built during the recent boom, with China’s stock of buyerless housing continuing to rise in July to 430 million square metres in July. That figure represents an 18.1 percent increase compared to the same period of last year.

Just last Thursday the authorities reopened sales of housing in China to foreign institutions and non-resident foreign individuals, after pushing those buyers out of the market during the earlier boom years.

Earlier last week, the central bank had cut the benchmark interest rate for five-year or longer loans to 5.15 percent. At the same time, the rate for housing provident fund loans was lowered to 3.25 percent, the lowest in history.

First Tier Cities to Set Own Policies

While the new down payment policy opens the door for more home sales in China’s second-tier cities and smaller communities, first-tier cities have been given the option to maintain the current 30 percent down payment levels.

According to the announcement, Beijing, Shanghai, Guangzhou and Shenzhen can make their own decisions about the minimum down payment ratio of second homes on the basis of the national policy.

During July China’s four largest cities grew faster than all other communities surveyed by the National Bureau of Statistics. Shenzhen led all cities nationwide last month with a 6.26 percent increase in average home prices compared to June. Next in line were Shanghai with a 1.65 percent increase, Guangzhou with 1.19 percent and Beijing with 1.07 percent.