House prices in the Chinese cities of Shenzhen and Shanghai have soared over the past 12 months, rising by 57% and 21% respectively.
The enormous price acceleration, buoyed by a raft of government incentives to encourage housing investment, lower interest rates, a flourishing shadow banking system and lack of investment alternatives elsewhere, has all the hallmarks of yet another dangerous housing bubble forming, particularly given the size and economic significance of both property markets.
With prices bubbling higher, policymakers in both cities have decided to act, announcing a slew of measures that came into effect last Friday in an attempt to quell rampant levels of speculation.
According to the state-run Xinhua news agency, investors in Shanghai who already own a house must now provide a down payment of at least 50% when applying for a new home loan, up from the 40% level previously required.
Beyond that, authorities stated that they will ban developers and housing agencies from offering certain loan services to buyers.
Non-local buyers must also prove they have paid income tax and social security premiums in the city for five consecutive years, up from two years under the previous requirement, said the Xinhua report.
Gu Jinshan, a director with Shanghai’s housing and urban-rural development commission, suggested the tighter restrictions were implemented to curb surging prices resulting from “irrational emotions”, speculation and illegal practices by some companies and agencies.
In a similar move to Shanghai, policymakers in Shenzhen — home to the hottest housing market in China at present — also announced measures to quash speculative forces, stating that those who have taken out a mortgage over the past two years, or those looking to buy a second property, must now make at least a 40% down payment to secure an additional mortgage.
Authorities also strengthen measures to guard against financial risks in the property sector, announcing they had banned financial institutions — including internet finance companies and small-sum lending firms — from offering margin lending to home buyers.
Yes, the same practice that led to the implosion of China’s stock market in 2015 has now infiltrated property investment in the city, allowing some investors to borrow their initial down payment in order to receive additional housing finance.
Leverage used to obtain additional leverage; what could possibly go wrong?
Shenzhen officials also stated that the government will increase land supply and build more government-funded houses to balance the market, adding that it planned to build 400,000 government-funded houses in the five years to 2020.
The question now is whether the tighter restrictions on housing investment will make a difference. To many, the horse has already bolted, with something more substantial required to reduce what are undoubtedly building financial risks.
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