Savills: Shanghai looks to cool red hot residential market

James Macdonald, Director of China Research says: “New policies are expected to have a big impact on transaction volumes in the short-term despite strong demand as many would be purchasers find themselves unable to transact their desired properties. Pricing should remain firm in the short-term and will only come under pressure if we see these policies result in a significant build up of unsold inventory. The other measures which were mentioned in terms of better supervision and oversight of real estate practices and financing, as well as a prioritisation of the development of small- to mid-sized units and talent apartments are all positive for the transparency and health of the market. An adequate supply of low cost housing is essential for a thriving economy and society.”

The Shanghai government today announced plans to increase down payment requirements and extend the required period for social security contributions for home purchasers without a Shanghai Hukou to five consecutive years, as well as a number of other policies.

Shanghai has recorded spectacular growth in residential prices over the last year with many analysts concerned that the market was overheating; similar to what has been seen in Shenzhen. The policies have been designed to restrict some of the more speculative or non primary demand, while continuing to support end-user demand. At the same time the policies are also designed to protect banks from over exposing themselves to the market; China Merchants Bank had already increased down payment requirements in the run up to the announcement.

The policies are likely to restrict transaction volumes in the short- to mid-term, slowing market activity and helping to slow the pace of price growth. Demand is likely to remain strong but the ability for some individuals to purchase properties will be impaired. This is unlikely to result in a fall in prices in the short term, however if policies remain in place for an extended period of time this could result in a build up of unsold inventory. This would place downward pressure on prices, especially in the first hand market.

Policy details
Key policies
• Non primary residence down payment is set at 50% for ordinary housing, and 70% for non ordinary units.
• Five consecutive years of social security payments for households without a Shanghai Hukou looking to buy a property, up from two years.
• Companies are forbidden from reselling commodity residential properties within three years of purchase

Better regulation and supervision
• HPR eligibility is checked prior to online registration.
• Strengthened pre sales certificate regulation and preventing developers from withholding units from the market
• A better regulated brokerage business
• A better supervised and regulated transaction process for second hand properties
• Misleading or false advertisement or information will be reported and publicised

Financing restrictions
• Prevent developers and agencies lending money for down payments
• Crackdown on unregulated financing in the real estate market
• Home purchasers have to declare that down payments are their own money; false testimony can result in their credit rating being penalised.

Increased supply
• Increased supply of low cost rental housing and talent apartments.
• Increased residential land supply for the development of small- to mid-sized units (i.e. less than 90 sq m)