Shanghai Hikes Down Payments to 70% to Cool Housing Demand

Shanghai’s government got the message from someone upstairs regarding the city’s 14 percent increase on housing prices during October, and the result is raft of new restrictions on housing purchases in the city.

Following several straight months of record increases in housing prices and sales volumes, the city government announced on Friday that purchases of second homes would require a 70 percent down payment instead of the 60 percent minimum previously in place.

In addition to the hike in down payment level, non-resident families must prove that they have paid  social security fees or income tax for at least two years to qualify for purchasing a first home in the city. The earlier requirement was only one year.

Another measure introduced was a project 30 percent increase in development land to be made available in the city, in an effort to quench demand and pressure on prices. There was no indication of when the policies would go into effect.

Sudden About Face on Real Estate Policies

The announcement from Shanghai’s housing bureau came just one week after the Shanghai headquarters of the central bank said Shanghai had “no immediate plan to change the existing 60 percent rule.”

That declaration came within days of a major market survey showing that sales of new housing space in October increased 60 percent over the total from a year earlier, with prices jumping more than 14 percent over the same period.

However the timing of the change may have been dictated by the start of the Third Plenary Session of the 18th Central Committee of the Communist Party of China – important meetings for setting government policy which kicked off on Saturday.

The rapid increase of housing costs has raised fears of a real estate bubble and many in the government see the lack of affordable housing to be a potential source of social unrest.

Cooling Down the Big Cities

The new measures in Shanghai came a week after a set of similar policies were announced in Shenzhen. The two cities are among the four major China cities, the other two being Guangzhou and Beijing, which have led the way for housing price increases during 2013.

Including these big four centres, the average price for new homes in the country’s top 10 cities, rose 1.95 percent from September to October and 15.69 percent year on year, according to the China Index Academy, the research arm of SouFun Holdings Ltd.

Measures similar to those launched in Shanghai and Shenzhen are expected for Beijing and Guangzhou soon.

Policies May Reduce Growth But Not Prices

While Shanghai’s new policies may have the ability to lower the rate of increase in real estate prices, they are not expected to bring prices down.

During 2010 and 2011, the central government introduced a series of measures designed to cool raging prices, with hikes in down payment rates having minimal impact. Many home buyers in China are able to purchase properties in cash, particularly if they already own more than one dwelling, and for these investors the difference between 60 percent down and 70 percent down will have minimal impact.

What has been effective in the past has been regulations which restrict the number of eligible buyers. The first restriction to seriously slow down the rate of real estate price growth in China, was the “Only One More House” rule enacted in early 2011, which limited households to only one more additional housing purchase beyond their existing holdings.

In light of this recent history, the new Shanghai restriction requiring an additional year of verifiable residency in the city may have some impact on housing demand.

However, the most significant effect of these latest regulations may be raising the spectre of future regulations and the element of fear that may bring for the city’s aggressive real estate investors.