Chinese property developers hit by house sale curbs

It is common knowledge that the Chinese government has been looking to further influence the Chinese property market amid concerns that house prices were running out of control. Today saw the share price of local property development companies tumble with new controls imposed across eight major Chinese cities. This is not the first time the Chinese government has introduced restrictions with limited notice with seven provincial capitals and a large municipality the centre of the new restrictions.

Ban on reselling homes

We already know that there is limited stock available in the Chinese housing market which is in itself having an impact on house prices. We have seen many investors buying up properties and then flipping them for significant gains. The new restrictions, which are slightly different across the impacted areas, will ban the resale of homes within 2 to three-years of purchase. There is no doubt this will limit speculation in the housing market but history shows us that the Chinese authorities may have been aggressive but not always successful.

Earlier this year local authorities across China attempted to cool the housing market with the introduction of new regulations making it more difficult for individuals to buy houses. The authorities also cut the finance available to property developers which immediately hit ongoing and future development projects. However, while this led to a reduction in house price growth across the major cities, demand simply moved away into the neighbouring provinces and smaller cities. Hence the introduction of a 2 to three-year ban on reselling a property after purchase in new areas.

Holding back the tide

Like King Canute’s futile attempts to hold back the water, the Chinese authorities have been exposed time and time again to the power of the property market. It would be wrong to suggest that the authorities have no influence on the market but the flow of funding into this particular area, both domestic and investment funding, is enormous. In a perfect world the Chinese authorities would fund a massive new build programme but this would take time and markets might overheat yet further in the meantime.

There is also the problem that, because of employment hotspots, many of the provincial capitals and large cities will always attract new visitors and demand for housing. Reducing the number of employment hotspots, and spreading employment opportunities further afield, is a more challenging task than many might appreciate.

Chinese housing market correction

Even before the Chinese authorities began to meddle in the housing market many experts were commenting about an expected correction in the short to medium term. The recent moves by local authorities to restrict the resale of houses may shorten the timescale to the expected house price correction but Chinese families still see property as the Holy Grail.

There is also a growing belief that because of a lack of housing stock there will always be underlying demand which will support prices to an extent. So, while we should possibly expect a correction in Chinese house prices there are no concerns about a significant fall in house prices to the extent that the economy would tip into recession. Whatever you think of the Chinese authorities meddling in free markets, they have expressed their policies, they have followed through with regulations and we can probably expect more “tweaks” in the short to medium term. They are determined to regain control of the Chinese housing market!

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