The Golden Week holiday on October 1-7 for the China’s National Day celebrations marked a turning point in the nation’s housing policy stance. As detailed in my blog in February, the government rolled out a slew of easing measures in the second half of 2015 in order to reduce property inventories. However, this policy easing led to a rebound in sales and consequently a price rally and a resurgence in land transactions in the first nine months of this year across China’s top-tier cities. Rising prices prompted the local governments to reverse their stance. During Golden Week, more than 20 cities announced tightening measures to rein in spiraling house prices.

In this last round of policy tightening, many cities aimed to curb investment demand by increasing down payment requirements for second-home buyers and re-imposing home purchase restrictions (HPRs) for non-local residents. In Suzhou and Nanjing, the minimum down payment was raised from 30% to 80% for buyers holding one mortgage and purchasing their second homes, while non-local residents were banned from buying second homes. In Beijing and Shanghai, government officials have even pledged to address the shortage by increasing land supply and building more small- to medium-sized units.

These new measures will impact sales volume, which is very likely to fall in the coming months, just as they did in Shanghai in April, when the local government introduced its first round of policy tightening at the end of March. While sales volume will likely fall, we do not expect house prices to see any meaningful correction in the short term. After nearly a year of robust sales, inventories in most of these higher tier cities are now at record lows, which strengthen developers’ pricing power.

Chart 1: Mass market inventory across 20 cities

Source: CREIS, JLL

Despite this shift in policy stance, the fundamentals of China’s housing market remain largely unchanged over the medium and long term. Higher-tier cities, such as Shanghai and Beijing, will still be the most attractive locations for domestic migration. This migration will provide continual strong support to the local housing markets, although lower tier cities will struggle to find growth engines and consequently their ability to absorb excessive inventories will be limited. That said, the reinstated HPRs in China’s top-tier cities could result in demand spilling over into some lower tier cities, although interest will be limited to a small number of strategically located cities.

We are of the view that the new tightening measures were actually much needed because the housing market appeared to be on the verge of overheating in many top-tier cities, where buyers were substantially increasing their leverage for new home purchases and developers were paying skyrocketing prices for land plots. The new measures will help buyers rationalise their home purchases and divert some of their wealth into other asset classes.

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