China made a major rule change regarding its housing market just before the spring festival holiday, lowering downpayments on purchases of new homes by first-time buyers from 25 percent to 20 percent, and from 40 percent to 30 percent for buyers of second homes.
Although full details on the new rule’s implementation have yet to be revealed, the attempt to lower the barrier to home ownership appears aimed at boosting sales in third and fourth tier cities where inventories of unsold housing remain at record levels.
And while adjusting downpayment levels has historically been the most effective way of regulating demand in the Chinese market, there are still a number of questions regarding how effective this rule change will be in helping the government to make good on its vow to “destock” its lower tier cities of unwanted homes.
First Tier Cities Excluded From Downpayment Cut
The lower downpayment levels exclude home sales in China’s first tier cities of Beijing, Shanghai, Shenzhen and Guangzhou where home prices have climbed sharply in the last year as sales recover.
The announcement, which was posted on the central bank’s website on February 2nd, specified that buyers of additional homes need not have repaid their first mortgage to qualify for the lower downpayments. The move could be interpreted as welcoming China’s wealthy class of real estate speculators back into lower tier markets.
While sales in China’s first tier cities recovered strongly in the second half of last year, lower tier cities are still faced with mounting inventories, according to recent research by JLL.
This latest reduction in downpayments is the third such move in the last year, after China cut downpayments for buyers of additional homes from 60 percent to 40 percent in March 2015. That move was followed by a reduction of the minimum downpayment for first time buyers in lower tier cities from 30 percent to 25 percent in September. The September rule changes also allowed buyers of additional homes who had paid off their mortgages to put down only 20 percent on their new home purchases, rather than 30 percent as had been required earlier.
Each of these previous downpayment reductions led to a spurt in home sales in the month following the policy change, but the introduction of a third round of downpayment cuts indicates that lowering this threshold has not yet helped the government to achieve its destocking goals.
Lower Downpayments Do Not Equal Affordability
By excluding larger cities from the lower downpayment levels, China appears to be keeping with its goals of clearing out excess housing inventory in lower tier cities – an overhang that is seen stifling real estate investment and pulling down economic growth.
Real estate has long been a pillar of China’s economy, but growth in investment in the sector slipped to one percent last year, its slowest pace since February 2009, according to data from the National Bureau of Statistics.
While lowering downpayments should give the market a boost in the next month or two, the longer term success of this measure will depend to no small extent on the economic health of the country’s smaller cities.
While growth in the service sector is giving a boost to cities like Shanghai and Shenzhen, the economies of many smaller cities in China continue to be based around manufacturing for export.
Unfortunately for these communities, China’s manufacturing sector has been on a losing streak of late. The country’s official manufacturing purchasing manager’s index (PMI) slid to 49.4 in January from 49.7 in December. This first batch of results for 2016 were the weakest for the measure of factory activity since 2012, and marked the sixth straight month of declines.
With housing demand depending heavily on the availability and stability of jobs, and unless someone can develop a plan to rebuild Changzhou’s economy around financial services, rekindling home sales in third and fourth tier cities may require more than just lower downpayments. Rebuilding the housing industry in China’s smaller cities will require better use of manufacturing resources and stronger overall health in the sector.
News source: http://www.mingtiandi.com/real-estate/china-real-estate-research-policy/china-lowered-downpayments-but-will-it-help-sell-homes-in-the-hinterland/