China's Real Estate: To Pop or to Prop

By Jiang Hongqiao, Xi Si, Lu Shangchun
Published: 2008-10-22

From Cover and page 4, issue no. 390, Oct 20, 2008
Abridged translation and additional research by Zuo Maohong
Original articles
: [Chinese][Chinese]

A real estate trading slowdown in China over the past several months has cornered developers into buying less land for new projects, hurting related business sectors and local governments' revenues in taxation and land transfer fees.

In response, local authorities in 18 cities throughout China have in past months introduced stimulus policies, including loosening credits, cutting taxes, offering subsidies, and extending housing project time limits to prop up the sluggish market.

On Oct 14, a group of housing affairs planners from 18 municipalities in Henan province met to discuss relief measures, and a central government official signaled that the real estate market decline was a concern.

Deputy director of the National Development and Reform Commission (NDRC) Du Ying expressed approval of local moves to stimulate the market during a State Council press conference that day.

Du's statement further fueled speculation that the central government might introduce a nationwide real estate market rescue package.

The EO learned from a source close to the Ministry of Housing and Urban-Rural Development (MOHURD) that central authorities did draft a related plan, but had yet to receive a directive from the State Council.

The source added that related central agencies had looked into adjusting certain housing policies, but the new policies would not come out as soon as the market had anticipated.

Saving the Property Market
According to market expectation and speculation, the stimulus plan might include a decrease in the down payment for second-home buyers and tax cut for second-hand home transactions.

Back in September last year, when the real estate market appeared to be overheating, the central bank had raised the mortgage down payment for second-home buyers from 30 percent to 40 percent.

It also set the mortgage rate for second homes at 1.1 times or higher than the benchmark rate to curb surging property prices.

In addition, a 5.5% business tax was levied on homes sold for a second time within five years since June 2006.

If there should be any adjustment in second-hand home transactions, this tax would probably be abolished, said Hu Jinghui, deputy general manager of China's leading real estate agency I Love My Home.

Though local authorities in 18 Chinese cities had introduced market rescue measures thus far, neither had the MOHURD, provincial governments nor the central government taken any official stand or action yet. 

The latest and biggest move was from east China's Hangzhou city, which issued altogether 24 stimulus policies, including loosening credit, providing subsidies, extending the time limit for real estate developing projects and more.

Shrinking Profits from Land
In September, some 1,300 homes were traded in Nanjing, Jiangsu's provincial capital--less than a fifth of the volume during the same period last year.

In Zhengzhou, Henan province, September's trading volume saw a year-on-year decrease of 21.7%, and the average property price was down by 148 yuan per square meter compared to August.

Poor trading performance dampened developers' enthusiasm to buy land from the government, which in turn led to decreasing tax revenue and land-transfer fees.

According to a report by the Development Research Center of the State Council, land-transfer fees and real estate-related taxes took up 40% of a local government's budget, and for some governments, land-transfer fees alone contributed more than 60% of their unbudgeted income.

The negative chain-reaction from the sluggish real estate market on local governments' revenues was a major reason why local authorities pushed for stimulus policies, said professor Yang Lingjie from the College of Public Administration of Zhejiang University.

"Local governments, banks, and real estate developers share common interests. The government will certainly tense up when the real estate market drops," said An Tifu, deputy director of China Tax Association.

Popping the Bubble, or Propping the Market
Despite local governments' efforts, the market had yet to show evidence of recovering.

"There's a slim chance that it will recover before the first half of next year. Consumers will go on waiting for lower prices, and they won't change this attitude in the near future," said an official from the Construction Bureau of He'nan province.

According to an online survey of, a real estate portal in Hangzhou, 76% of netizens surveyed thought the new policies Hangzhou had adopted would have little impact in pursuaving them to buy property.

To most netizens, what truly dropped in real estate since early this year was the trading volume rather than the price.

While a decreasing trading volume made most people more confident that prices would fall further, the slower domestic economy and global economic woes also warned them to be more prudent before making any purchase.

Hujie Investment Consulting Chief Analyst Yang Yin believed as long as the real estate bubble remained, any government measures would have little influence over consumers' appetite for buying property in the short run.  

He said "rescue" measures, if materialized, were only meant to change the expectations in housing consumption, not to pursue immediate effects.

The boom in China's real estate market had continued for some years before the recent slump.

Statistics from the official website of Beijing Real Estate Trading Center showed Beijing's average property price in 2006 grew by 16.7% from the previous year. In 2007, the average price for second-hand houses in Beijing climbed by 45%, according to an annual report from real estate agent Zhongdahengji.

Residents in major Chinese cities like Beijing had long complained of high prices and a lack of affordable housing units. In a survey by China's leading portal, 80.9% netizens opposed real estate rescue measures from the government.