Sliding Prices Raise Doubts Over China's Property Policies

As China's home prices start to slide from historic highs, the country's leaders have remained largely silent about the government's goals.

Since taking power last year, President Xi Jinping and Premier Li Keqiang have said little about their objectives for the property sector, despite policy shifts that have left buyers confused and developers on edge.

After more than a decade of soaring growth, housing prices have either slowed or started to fall, sparking fears that the property bubble may have already burst.

In July, 64 of China's 70 major cities registered price drops for new homes from June, the National Bureau of Statistics (NBS) reported, marking the third straight month of declines.

Average prices dipped 0.9 percent from the previous month, Reuters reported, while only two cities showed slight gains.

On a year-to-year basis, July's average prices still rose 2.5 percent, but that was a shadow of the 9.9-percent growth from a year earlier at the start of 2014.

A separate July survey of 100 cities by the China Real Estate Index System found monthly declines in 76 markets including all 10 of the largest urban areas, the official English-language China Daily said.

While official housing figures for August are due next week, private surveys cited by Reuters found that prices lost ground for the fourth month in a row.

But so far, the government has given no clear signal whether it wants prices to come down on a yearly basis or whether it will act to reverse the continuing monthly declines.

In the meantime, sales have stalled as buyers wait to see how far or fast prices will sink, raising concerns for economic growth. In the first seven months, property sales fell 7.6 percent from a year before, according to the NBS.

Contrasting policies

The government's reticence is striking on several counts, not least because of the contrast with policies managed by former Premier Wen Jiabao, who frequently criticized property prices as unsustainable and unaffordable for first-time buyers.

Wen left no doubt that he wanted prices to settle down. But as the housing market changes course and turns lower, the government under Xi and Li hasn't been entirely clear about what it wants.

"Wen Jiabao used to talk a lot about housing speculation and housing prices being too high. He was very out front on that," said Nicholas Borst, China program manager at the Peterson Institute for International Economics in Washington.

"Li Keqiang is much quieter about the whole market," Borst said.

The absence of guidance from the government seems extraordinary in light of its initial moves to bring property speculation under control.

In March 2013, the incoming government ordered profit taxes of up to 20 percent on home sales, giving local authorities one month to issue their own rules.

The result was a patchwork of local regulations, mostly discouraging speculative buying of second and third homes.

Then as now, the central government provided little explanation of its goals or how far the policy should go.

"Maybe this is going to be the style of this administration, to just issue policies without talking too much about them," said Thomas Rawski, a University of Pittsburgh economics and history professor, in an interview at the time.

More than a year later, Rawski's reading still seems to hold true, at least for the real estate policy.

One after another, local governments that imposed purchase restrictions on property have reversed them as their housing markets have gone cold.

As of Aug. 30, some 40 of the 48 cities with limits on property buying had lifted them, according to state media reports, but the central government has not indicated whether it supports or opposes the moves.

Hands-off approach

The hands-off approach appears to continue a more adaptable course set by Li in his first work report to the annual session of the National People's Congress (NPC) last March.

"For the first time in eight years, the closely watched government work report contained no specific commitment to 'regulate property prices' or to 'regulate the property market,'" the South China Morning Post observed.

Instead, Li pledged to "regulate differently in different cities in light of local conditions, ... curb demand for housing for speculation ... and promote sustained and healthy development of the real estate market," the paper said.

But the reversal of local real estate rules after little over a year makes it unclear whether the central government is regulating at all.

In one of the few policy moves affecting the property sector in May, the People's Bank of China (PBOC) urged commercial banks to speed up loan approvals for first-time buyers.

The uncertainty is remarkable, given the links between China's decade-long building boom and critical issues for the economy, the environment and sustainable development.

After shaking a big stick at developers and investors last year, the government now seems to have backed off.

But it has also given no clear sign that the get-tough reaction to price hikes has run its course, leaving buyers and sellers to wonder whether the government will tolerate a drop of 10 percent, 20 percent or perhaps more before it steps in with support.

"In general, they're willing to see a small correction play out," said Borst.

"But I think there's a definite floor on that, as well. A couple percentage points of price drops over the next month or two are fine, but if we start seeing anything resembling double digits, that will set off panic bells," he said.

Complicated issue

One consideration is that the property issue has become more complicated and difficult to manage with a single policy as prices have started to sour.

Local governments have continued to rely on sales of land rights for a substantial portion of revenues, turning a development slowdown into a fiscal concern.

In the first seven months of the year, land deals generated 2.5 trillion yuan (U.S. $405.8 billion) for governments across the country, the official Xinhua news agency reported.

The land revenue rose 23.9 percent from a year earlier, but the gain was far less than the 49.4-percent increase recorded during the comparable period in 2013, Xinhua said.

Some of the second and third-tier cities that have run into trouble with slow sales and reversed multiple-purchase policies are the same ones that the government has targeted for its urbanization plan to move over 100 million rural dwellers off the land.

Yet, some cities have also seen spectacular price spikes over a decade, making them unaffordable for migrants even with the recent decline. Property prices in some smaller towns have jumped as much as twenty-fold, according to The New York Times.

The competing interests and conflicting conditions may frustrate implementation of any single policy on pricing. Attempts to replace land sales as a primary revenue source have also been slow.

The State Council, or cabinet, has moved only gradually on a draft regulation for real estate registration that would identify property owners as a prelude to property taxes.

Reports have differed on the pace of implementation.

On Aug. 10, Xinhua quoted a Ministry of Finance official as saying the new tax would be imposed in 2017. But on Aug. 25, China Daily cited an unnamed NPC official, saying the tax would be assessed starting next year.

The speedup may reflect rising concern with the policy problem. Pilot property tax programs have been operating in Shanghai and Chongqing Municipality since 2011.

The effect of the tax on a weakening market is unclear, since the policy was devised to dampen speculation and keep prices from climbing too high.

Buyer reaction

In the meantime, price declines have spurred concerns that buyers will not respond to the lifting of multiple-purchase curbs as they once did.

"If these people decide suddenly that housing is no longer such a good investment, that source of demand for new housing might disappear," Borst said.

Borst said there have been positive and negative views of the policy toward the property sector.

The positive view is that the government is taking a more "hands-off" approach to the economy and trusting more to market forces.

The negative view is that the government is becoming increasingly concerned about economic weakness and looking to the real estate sector as a source of growth and jobs, he said.