Every Policy Became an Incentive to Buy: How Hangzhou Arrived at a 17-Million-Yuan Deposit, Step by Step

A 17-million-yuan earnest deposit: buying a home in Hangzhou has become something close to incomprehensible.

People in Hangzhou are getting used to first-tier-city prices and a home-buying process that works like a lottery.

In early June, Sunac's Yihe Yuan development in Hangzhou's old town opened its doors to prospective buyers, preparing for a third round of pre-sales that was still waiting on government approval. The location is nothing special — the nearest subway station is 6 kilometers away. The price is not: 47,000 yuan per square meter, with even the smallest unit costing more than 7 million yuan, about 50% above the median price of new homes sold last year in Beijing and Shanghai.

Sunac attaches other conditions. Prospective buyers must swipe a debit card to prove they hold 4 million yuan in cash savings. The odds in the lottery are around 50%. Winners sign the purchase contract that same day and pay a 1.2-million-yuan cash deposit, then hand over the down payment and all the mortgage paperwork within two days.

"That's actually pretty reasonable," said a woman who looked to be in her sixties or seventies, speaking in a local accent, once she had heard the terms. She had just come from a new development in Xiacheng District, where units sell for nearly 80,000 yuan per square meter and the developer requires buyers to freeze 5 million yuan in a bank account merely to enter the lottery. Even so, six times as many people entered as there were units for sale.

Freezing funds to enter a lottery is a policy Hangzhou introduced in May; nationwide, only Shenzhen asks for anything similar. The development that demands the largest frozen sum, Liu'an Xiaofeng, requires buyers to wire 17 million yuan in cash straight to the developer to be eligible for the drawing. The interest lost on a single round of the lottery comes to about 30,000 yuan. It, too, has now sold out.

Homebuyers have accepted Hangzhou's peculiar reality. Zhao Xin, who comes from a working-class family, spent a week last summer settling on a new home in Hangzhou's Xianlin area, priced at 1.8 million yuan in total, with a 580,000-yuan down payment.

"At that point, it was already decent of them to let us take out a mortgage at all." Even though the down payment she paid was above the government-mandated 30% minimum, Zhao Xin still thought the developer was being decent, because the other developments she looked at around the same time were demanding payment in full, in cash.

"Buying a home really blew past everything I thought about spending. It's definitely the biggest purchase of my life," Zhao Xin told QDaily. She had already worked in Hangzhou for more than four years without ever considering buying. She never buys anything she can't afford, and she has never once paid off a credit card in installments.

Now, for the sake of this home, Zhao Xin has borrowed 580,000 yuan from her mother — almost her mother's entire savings. Monthly payments on more than a million yuan of debt eat up nearly 40% of her after-tax salary. She doesn't even live there. She couldn't afford anything in a good location, so she still rents where she lives and treats the new home as an investment.

What changed things for her was the G20 summit held in Hangzhou in September 2016.

The G20 summit set off an explosion in Hangzhou home prices, though no one can quite explain why

After graduating in 2013, Zhao Xin chose not to go back to work in Ningbo. She spent a year at Xinhua News Agency, switched into a career as an internet product manager, and in June 2016 started a job at an internet company in Hangzhou's Xixi area, which is why she moved to a nearby residential compound.

It was her mother, who came to help her settle in after the move, who first paid attention to home prices. Chatting with neighbors about buying, Zhao Xin's mother was told: "If you're going to buy, do it before the G20 opens. Prices are going to jump once the summit ends."

Zhao Xin cared little about what drives prices up or down. At the time, she says, she thought: what does a meeting of world leaders have to do with ordinary people? On weekends she went to look at homes only because her mother pushed her to, with an eye toward eventually living in one.

But about a week after the summit closed, on September 12, 58 developments across Hangzhou issued 74 notices of price adjustments — almost all of them increases, ranging from a few hundred to over a thousand yuan per square meter. Resale homes followed.

Feeling the pressure, Zhao Xin dragged her mother out to look at homes several weekends in a row, no longer fussy about layout or location. She told QDaily that by around November that year, prices for both new and resale homes she was tracking had started climbing.

By the end of the year, the average price per square meter in Hangzhou's main urban districts had posted its biggest jump since 2010 — 15% — and the number of unsold new homes on the market fell for the first time since 2009.

The homes Zhao Xin looked at kept getting farther out. Several developments near the city center that she had liked either required payment in full or demanded hundreds of thousands of yuan in proof of funds up front. Both were beyond her.

She then set her sights on a development near two subway lines, which by that point was already selling under a price cap. Having missed the public sale window, she tried pulling strings with the developer to land a unit she liked, waited a month and still came away with nothing, which upset her badly.

New-home prices in Hangzhou rose for eight straight months starting in March 2017, and the longer Zhao Xin watched, the more she worried she would eventually be priced out even of the far suburbs. After weighing her options, she decided to buy.

"I call the place I bought a decent development because when it first opened, it didn't force you to buy a parking spot along with the unit. By then a lot of developments already required you to buy a spot — usually starting at 200,000 yuan — just to qualify to choose a unit. That's a price hike in disguise," Zhao Xin told us.

Frontline sales staff saw the effects of the summit earlier.

Zhang Shuang runs the Hangzhou office of a real estate sales agency. It mainly handles sales for one of China's three biggest developers, and its main territory is the Qianjiang Century City sector of Hangzhou's Xiaoshan district — a sector on the eastern bank of the Qiantang River, next to Binjiang District.

Starting in June 2015, Zhang Shuang instructed his sales team to stop mentioning "Qianjiang Century City" in their marketing altogether and to sell homes on the G20 instead.

But like Zhao Xin, Zhang Shuang had no idea what connection there could be between housing and a summit made up entirely of political dignitaries, one that wouldn't even bring in tourists. He told QDaily that he pushed the G20 in the first place because the "Qianjiang Century City" pitch had gone nowhere for five years; even after Hangzhou lifted its homebuying restrictions in 2014, they could sell only thirty or forty units a month, so he had to try a different angle. Even the earliest buyers who rushed over cared most about school districts. Hardly anyone asked about the G20.

So when Hangzhou's housing market suddenly caught fire during the 2016 Spring Festival holiday, the sales staff were caught unprepared.

As in past years, the sales office was essentially closed from New Year's Eve through the tenth day of the lunar new year, with one or two staff on duty each day. On the fourth day of the new year, a staffer on duty called Zhang Shuang to say the sales office had been "completely overrun" — "trampled flat" by buyers — so he cut his own holiday short and rushed back to Hangzhou to reinforce the front line.

Almost everyone flooding in at the time was from out of town, spending freely, buying three or four units at once. One development sold ten times as many units in a single month as it had a year earlier.

According to the Hangzhou Housing Authority's annual market report, 2016 had the highest share of out-of-town buyers in four years: more than a third of all homes in Hangzhou were bought by people from elsewhere.

"That wave of buyers was one hundred percent investors. No local buyers at all, all from out of town — Wenling, Shanghai, Jiangsu, Guangzhou, you name it, they were there," Zhang Shuang told us. "They'd tell us straight out that they were buying because the G20 was coming."

Sales staff weren't the only ones who failed to see Hangzhou's boom coming. Developers didn't either. In 2015, the year the host city was announced, both the floor area of land sold in Hangzhou and the prices it fetched hit five-year lows. Vanke, Country Garden and other developers made no major new investments in a market that had been depressed for years; they had planned to spend 2016 clearing out projects that were already finished.

In March 2016, Hangzhou sold 25,000 new homes in a single month, a record at the time. From April through October, monthly sales held at around 20,000 units. During that stretch, the developer Zhang Shuang worked with began "controlling the flow," giving his agency a quota of only 200, or 150, units to sell each month.

"That started around June or July of 2016. Because they figured that if they didn't do it that way, the damn company's Hangzhou operation would be wound up by the end of the year, with no houses left to sell," Zhang Shuang said, his voice noticeably rising as he recalled it.

Hangzhou's home prices had been flat for years before the G20, and the government had rolled out a string of policies to stimulate sales

In May 2010, Hangzhou's home prices briefly passed those of Beijing and Shanghai to rank first nationwide, at roughly 22,066 yuan per square meter.

A series of homebuying restrictions followed — higher down payment requirements, higher mortgage rates — and continued through 2014, driving Hangzhou home prices down from 2011 to 2015. By December 2014, as money flowed into the stock market, Hangzhou recorded the steepest year-on-year price drop among the 70 large and medium-sized cities tracked by the National Bureau of Statistics, at 10.3%.

The best selling season in real estate is September and October, known as "Golden September, Silver October."

Qian Yin, a former Longfor Properties salesperson, still remembers that business was so bad they had to chase clients down. In October 2014 she took only a day and a half off the entire month, calling 100 to 200 clients a day on top of showing model units to visitors at the sales office. Longfor required a written record of every call and every visit, including what size unit and what floor plan each client wanted.

Performance was reviewed weekly then. Do the math: with fewer than ten people in the sales office, each person sold one home every three days. By 2015 things began to improve. In July and August, at a development Qian Yin handled in Hangzhou's Shenhua sector, the first phase sold roughly 70% to 80% of its units.

That roughly matches what Zhang Shuang saw in Xiaoshan, except that the problem across Hangzhou at the time was that while new-home sales volume had picked up, prices didn't steady and start climbing slowly until the end of 2015.

This was the result of a series of policy moves running from the central government down to Hangzhou.

At the end of 2015, the Central Economic Work Conference called for encouraging residents and institutions to buy up unsold housing stock and for "scrapping outdated restrictive measures." Around the 2016 Spring Festival, several national ministries loosened the housing market in quick succession. The State Council announced that in cities without homebuying restrictions, the minimum down payment on a first home would drop from 30% to 20%; the central bank cut the reserve requirement ratio twice within a month, by a combined 1 percentage point, freeing up roughly 1 trillion yuan for banks to lend; and the Ministry of Finance lowered the deed tax and shortened the holding period required for a business-tax exemption on resale homes.

"Without pressure from the central government, local governments — under the principle of tailoring policy city by city — have no motivation whatsoever to cool their own housing markets. And loose monetary policy has given the public and enterprises more than enough ammunition to invest with," a report on the Hangzhou housing market by the Zhejiang Daily Media Real Estate Research Institute noted.

Hangzhou's own local incentives pushed buyers along too, to varying degrees: a 12% discount on commercial mortgage rates for first-time buyers, and a housing provident fund contribution rate as high as 24%, twice Shanghai's. Zhao Xin says the high provident fund rate is what drew her in; she turned down a job offer in Shanghai to stay in Hangzhou.

Banks, meanwhile, sent still more money toward the buying frenzy.

"From the mortgages I handled, Hangzhou's housing market really started taking off in the second half of 2014. It's not as if we had to go out and listen for signals. You just watched which way the branch was leaning. If the branch said, 'This period, we're going to push mortgages hard,' then we knew what to do," Sun Rui recalled.

Sun Rui works in the personal loans department at the Hangzhou branch of a joint-stock commercial bank. In mid-2014, his branch began promoting mortgage lending internally, encouraging staff to cultivate and expand their networks of developer contacts.

A month before the G20 summit opened, the bank internally allowed every department to issue mortgages, including the micro-lending department, which previously hadn't been permitted to.

Banks divide their lending units into personal loan departments and micro-lending departments, which handle consumer loans, small business loans and the like. To control risk, Sun Rui's bank barred the micro-lending department from issuing mortgages between late 2014 and mid-2016, reserving that business for the personal loans department.

"With mortgages, you could sit in a sales office for a day and land three to five deals — on a good day, ten," Sun Rui said, adding that in the second half of 2016, at his busiest, he was processing as much as 70 million yuan in mortgages a month.

Only after the summit ended did banks start tightening lending quotas and issuing risk warnings.

After the G20, Hangzhou restricted homebuying by outsiders, which only stoked a fresh wave of buying

In September 2016, at about the same time banks tightened lending, Hangzhou barred non-local residents from buying homes in the city and suspended household registration through home purchase. Two months later, outsiders who hadn't paid social insurance continuously in Hangzhou for a full year within the past two years were also barred from buying.

The development Zhang Shuang represented in Qianjiang Century City went quiet overnight; the whole sales office went back to selling twenty or thirty units a month. A wealthy businessman who had traveled from Xiamen on a friend's referral, ready to spend more than 10 million yuan, came away empty-handed.

Even so, new-home prices kept climbing, to roughly 32,000 yuan per square meter, nearly double what they had been a year earlier.

By the 2017 Spring Festival, after less than half a year of calm, Hangzhou's housing market heated up again, this time with locals as the main buyers.

"Everyone coming to buy now is local, since most out-of-towners are restricted. They sat on the sidelines for a while, then found they'd been taught a lesson — they watched other people buy in at 10,000 or 20,000 yuan and suddenly, in no time at all, it's over 30,000. They felt like they'd missed out, like, 'Oh, so real estate really can make you money,'" Zhang Shuang said.

Residents of Hangzhou's outer suburbs who had received shantytown-redevelopment compensation rushed in to buy too. Starting in 2015, the People's Bank of China issued shantytown-redevelopment loans through the policy banks — the China Development Bank and the Agricultural Development Bank of China — encouraging residents to use that money to buy homes rather than move into government-built resettlement housing.

As of May this year, the China Development Bank had issued more than 3.7 trillion yuan in such loans, with Zhejiang and Hangzhou far out in front. In the first quarter of 2017, Zhejiang province ranked first nationwide in the share of shantytown-redevelopment projects started, and Hangzhou had more such projects than any other city in the province.

The share of out-of-town buyers dropped sharply in 2017, to 14.4%.

Li Shu, from Shaoxing, who works in Alibaba's tax department, was one of the local residents who dared to buy. Slightly ahead of Zhao Xin, in the second half of last year she bought a two-bedroom unit for 2.49 million yuan in Zhuantang, about 15 kilometers west of her office.

Li Shu started planning to buy in 2014, when she graduated in Beijing and returned to Hangzhou to join one of the Big Four accounting firms. She was thinking of a resale home in the main urban district, close to her office, under 3 million yuan, to live in herself.

She once liked an 89-square-meter, two-bedroom unit in what is now Hangzhou's hottest sector, Qianjiang New City. When she looked at it in early 2016 it was under 2.5 million yuan, a leftover from the 2010 boom, put on the market by Wenzhou property speculators.

Her parents weren't sure whether she would settle in Hangzhou or move on to Beijing or Shanghai, so they didn't support the idea of buying, and since prices had been flat for five years, she wasn't in a rush either.

By 2017, when she jumped to the "client side" at Alibaba along the typical Big Four career path, Hangzhou home prices had changed completely. "I found that the resale homes I liked in the city center were no longer affordable at all. That unit in Qianjiang New City had gone up a million yuan in less than the half year around the G20."

Colleagues of similar age from various departments on Alibaba's campus talked about housing during work breaks too. Li Shu says the information reaching her from every direction was all about prices going up: "The whole air around you was saying prices were rising."

Zhang Ge, who joined Ant Group a bit earlier than Li Shu, bought his home in that same atmosphere. His boss even encouraged him at the time, he recalls, saying: "Just go ahead and buy. I'll lend you some money."

Ironically, one of the things that pushed Li Shu to buy quickly was Hangzhou's new restriction policy. Starting in March 2017, Hangzhou began determining first-home eligibility on a household basis, and the down payment on a household's second home jumped from 30% to 60%. She was about to register her marriage, and her fiancé already owned a home in his name.

The policy was meant to cool buying enthusiasm. For Li Shu, who believed prices would never fall, it firmed up her resolve to buy a home of her own before the wedding.

"I felt that if I bought after getting married, I'd be wasting a home-buying ticket that only needs a 30% down payment," Li Shu said. The chance to buy with 30% down sounded to her like a discount coupon in a Taobao shop, the kind designed to lure you into checking out.

From choosing the development and starting the fund verification to receiving the first text message about a mortgage deduction took nearly seven months, most of it stuck in loan approval. In all that time, the two of them never read the housing contract or the loan contract carefully.

"My job deals with numbers every single day, and my husband works at a bank. Reviewing contracts is literally part of what I do, and yet when it came to my own contract, somehow I just wasn't as careful. What else could I do? If you don't sign, there's someone else waiting to sign it."

For the fund verification, Li Shu used a 500,000-yuan proof-of-funds statement from her mother's brokerage account, and the down payment of nearly 750,000 yuan also came entirely from her family. "That money basically wiped out my parents' savings. I only put in 60,000. The mortgage, my husband and I are paying together."

Together they earn just over 20,000 yuan a month after tax. Counting their current rent of 3,400 yuan a month, their fixed monthly expenses come to around 12,000 yuan. It isn't tight, but as she says herself, with that much extra going out every month, buying the home has certainly affected their day-to-day life.

Convinced prices will never fall, and with no other good place to put their money, buyers read every policy as an incentive to buy

The G20 summit pushed prices up so far, so fast, that the government reached again for administrative tools: restrictions on who could buy, and then on price. The Central Economic Work Conference's call to "establish a fundamental system and long-term mechanism suited to national conditions and consistent with market principles" was set aside once more.

The single biggest cause of the supply-demand imbalance in today's hot city housing markets is the cap on new-home prices.

Zhang Shuang described a development he represented in mid-2017, originally due to launch on June 30. The government wouldn't approve the developer's declared price of around 32,000 yuan per square meter, so the pre-sale permit dragged on for more than half a year. In the end the developer gave in and cut the price to around 28,000 yuan per square meter before it was approved — even though nearby resale homes were already going for more than 30,000 yuan by then.

At first developers found other ways to make that money back. The 700,000- to 800,000-yuan parking spot was born in that period. Once parking spots were restricted too, developers began demanding down payments above 30%, or full payment in cash, to get their capital back as fast as possible.

"Real estate is already a planned economy. That's a reality we need to face," Zhang Shuang said. "From the moment land is put up for sale, the government decides the ceiling price and the floor price. Once a developer acquires the land, the government decides how quickly it has to be developed and brought to market. And when it does come to market, the government decides what price you're allowed to sell at."

Under all this planning, new-home prices were held down — which stimulated new-home sales further. When a price cap makes a new home cheaper than the resale homes next door, buyers are guaranteed to profit the moment they buy.

By this point the price indices and the month-on-month and year-on-year growth figures published each month by the statistics bureau and the housing authorities could no longer reflect what prices were actually doing. The official index is tied directly to the sales filed in the online contract system that month. To keep the index from crossing some invisible red line, regulators would guide sales — filing 3 units at an average price under 25,000 yuan one week, say, then 5 units at an average under 35,000 yuan the next — and control the monthly index that way.

In this kind of buyer's market, the sales pitch at one popular development in Hangzhou's Xiaoshan district has been reduced to three lines:

• The lot next door is opening this year at over 30,000 yuan per square meter; we're at 21,000;
• Everything you need for the lottery paperwork is on that board;
• Go look at the model unit yourself, and come find me if you have questions.

After that, the way developers screen buyers escalated from proof of funds to frozen funds. But a few million, or ten million-plus, yuan is no small sum, and once developers have that money they pay buyers no interest on it.

Take 5 million yuan. Money-market funds like Yu'e Bao often yield around 4% a year, so 15 days of interest on that sum comes to roughly 8,000 yuan. Apply the same math to Liu'an Xiaofeng's 17 million yuan and the interest comes to 28,000 yuan.

Yet the handful of developments that demand such sums have already sold out.

Buying a home as an investment is also, in its way, something people feel forced into.

The Financial Stability Bureau of the People's Bank of China noted in a working paper that, as rational economic actors, people in developed and developing countries alike will seek the mix of assets that earns them the most.

But the authors argue that in China, constrained by long-standing capital account controls, foreign exchange controls in particular, residents have few investment channels open to them. With the stock market sluggish, the bond market underdeveloped, and an expectation that home prices will never fall, putting wealth into real estate has become one of the few options left.

More important, over the long run real estate is close to the only asset in China that has appreciated year after year, with price growth reaching 20%, even 40%, in some years. In the main urban districts of first-tier cities, prices have risen roughly tenfold over a decade.

Even listed A-share companies now hold property to preserve the value of their assets. More than 1,500 A-share companies together hold investment properties worth over 1 trillion yuan — and that leaves out unlisted companies.

Consumers find it hard to accept that home prices could fall; there have been plenty of cases nationwide of existing owners besieging sales offices after a developer cut prices.

Though she called it the biggest purchase of her life, Zhao Xin doesn't actually like the home she bought. She has no plans to live in it once it is handed over; she intends to rent it out and look for a chance to sell later. There will be another sale and another purchase down the line, so this won't be her biggest purchase after all. It is an investment.

And Li Shu, who is about to move into the home her husband bought before they married, plans to sell the one she rushed to buy before the wedding after holding it five years — also as an investment.

However people first thought about buying a home, faced with the expectation that prices can never fall, they have been pushed by ever-tighter policies into rushing headlong into this pass-the-parcel game, terrified of falling one step behind and never being able to afford a home again.

Even people buying to live in have become investors, spending their savings and taking on millions in debt, because this looks like the only reliable investment there is. No one thinks they will be the one left holding the parcel when the music stops — or rather, they believe that even if they are, they won't lose much.

(At the request of interviewees, Zhao Xin, Zhang Shuang, Zhang Ge, Li Shu, Qian Yin and Sun Rui are all pseudonyms.)

Graphics/Feng Xiuxia

Unless otherwise noted, the cover image and the images in this article were taken by the author.

Appendix: Key moments since 2010 when the central and Hangzhou governments imposed and lifted homebuying restrictions

Key moments since 2010 when the central and Hangzhou governments imposed and lifted homebuying restrictions

2010.1

The State Council requires that the down payment on a second home be no less than 40%

2010.4

The Ministry of Finance issues a notice determining first-home status on a household basis: if either spouse has previously bought a home, any subsequent purchase counts as a second home

2011.1

Hangzhou raises the down payment ratio for second-home mortgages to 60% and the mortgage rate to 1.1 times the benchmark rate

2014.7

Homebuying restrictions lifted on all new homes in Xiaoshan, and on units of 140 square meters or larger in Hangzhou's main urban districts

2014.8

Homebuying restrictions lifted on all new homes citywide in Hangzhou

2016.2

Hangzhou lowers the minimum down payment to 25%; deed tax set at 1% for units under 90 square meters and 2% for units of 90 square meters and above

2016.3

A "1+X" compensation rule is introduced for relocated residents: take one home, with the remainder converted to cash based on the area and value of the demolished property

2016.9

Within restricted urban districts, sales of housing — new and resale alike — to non-Hangzhou-registered households that already own one or more homes are suspended; provident fund and commercial mortgage rates are raised at the same time; household registration through home purchase is suspended

2016.11

Non-Hangzhou-registered residents who haven't paid social insurance continuously for a full year within the past two years are barred from buying new homes; new homes are sold under price caps

2017.3

Hangzhou-registered households that already own two or more homes are barred from buying new homes; a lottery system for homebuying is introduced