After 450 Rounds of Property Controls in a Year, How Has the Bar for Buying a Home in Chinese Cities Changed? | 2018 Business Events ⑧

Two new policies on an average working day — that was Chinese real estate in 2018.

Some are the product of continuous change — change that will go on reshaping our lives. Some are the intrusions of even less controllable forces into the business world, forcing market participants to keep adjusting their strategies. And some come from companies themselves: how a company, once it reaches a certain size, makes its peace with the public, with consumers, with public authority, and with everything else around it.

A country gets the companies it deserves. In 2018, as always, the business world changed a great deal. The year's biggest business events only confirm it.

Hukou (household registration) and homeownership set the bar for staying and working in a Chinese city. In 2018 that bar moved constantly: cities across the country issued 450 rounds of property controls, against just 250 the year before.

The dense run of policy began in the first week. On January 5, 2018, eight months after imposing purchase restrictions, Lanzhou announced it would lift them in some districts, dropping the requirement for a year of social-insurance and tax records. Three days later Hefei said land parcels sold before November 2016 would not be subject to price caps, and Nanjing and Chengdu each issued new talent-residency rules letting anyone under 40 with a bachelor's degree register a hukou and buy a home outright.

Just a week after Lanzhou's easing, the Ministry of Housing and Urban-Rural Development held a press conference to insist that property-control targets would be pursued "without wavering" — a phrase it repeated three times.

But second-tier cities showed no sign of slowing their loosening of residency rules. In the first five months of 2018, 13 second-tier cities had already issued looser policies to pull in new residents. On May 16, Tianjin unveiled its lax "Haihe Talent" residency policy: no job, no housing, no social-insurance record required — anyone under 40 with a bachelor's degree could register a hukou by filling in a form on their phone. Within 24 hours more than 300,000 people applied; over the next 72 hours the city revised the policy four times, raising the bar each time.

Where you hold your hukou decides your access to healthcare, social insurance and your children's schooling. It is also the most direct lever local governments have over property investment. As policies loosened, National Bureau of Statistics data show, by July 2018 average prices for both new and resale homes were rising in 66 of 70 large and mid-sized cities — the highest level in two years.

After the Politburo again vowed to "resolutely curb rising home prices," 193 control measures came out in a dense burst over the following three months — this time raising the bar for buying.

We picked 10 cities with distinctive policies: Beijing, which caps its total population while opening residency to people earning 70,000 yuan a month; Tianjin, Xi'an and Wuhan, which used talent policies to fight over young people; and Hangzhou and Shenzhen, where lotteries required buyers to put down "sincerity deposits" of several million yuan just to qualify.

Some control tools had been around for years and were simply extended to more cities: longer minimum holding periods before resale, suspensions of corporate home buying.

Others were invented in 2018: the lottery systems in Xi'an, Changsha and Wuhan; Hangzhou's sincerity deposits of up to 17 million yuan; Wuhan's 20% discount on homes for people who qualify as talent.

We found eight clear trends in how the bar for buying a home has moved.

Nearly every second-tier city lowered the bar to grab young people — some even offered discounts

In 2018, second-tier cities competed for young people with unprecedented force.

Xi'an, which moved early and hard and loosened its talent-residency rules five times in a single year, chased talent so openly that it turned into a joke. A traveler changes trains at Xi'an station. A police officer asks: "Are you from Xi'an?" "No." "What's your education? What year did you graduate?" "Bachelor's, graduating this year." "Come with me to the police station — we'll register your hukou on your degree and reimburse your train ticket."

The looser rules clearly worked. Since its talent policy took effect, Xi'an's registered population has grown by 1.55 million; in Wuhan, 205,000 college graduates registered a hukou over three quarters, double the figure a year earlier.

The bar fell from Wuhan and Chengdu's "graduates can register a hukou before they find a job" to Shenyang, Hohhot and Nanchang's "a vocational-school diploma is enough." Between 2017 and 2018, all 29 second-tier cities except Chongqing rolled out talent policies of varying looseness.

It was not just hukou. Impatient second-tier cities began using subsidies to attract talent. Nanjing arranged accommodation and reimbursed travel for job interviews; more direct cities simply named a figure.

Hainan province offered master's degree holders 2,000 yuan a month and bachelor's degree holders 1,500 yuan a month toward buying or renting a home, for three straight years. Hefei gave bachelor's graduates a rental subsidy of 15,000 yuan a year. Harbin offered new residents with bachelor's degrees 500 yuan a month; Taiyuan, 1,500 yuan.

In a society that is steadily aging, young people are a scarce resource.

Healthcare and social security today rest on the young: those who work pay in, and the money goes to the retired and the unemployed; the healthy pay in, and the money treats the sick.

Over the past decade the share of Chinese aged 20 to 40 has fallen steadily. The 2010 census counted 219 million people born in the 1980s, 188 million born in the 1990s and 147 million born in the 2000s — a 33% shrinkage across three decades.

The future looks less encouraging still. According to 2016 national census figures, falling birth rates left China's population aged 10 to 19 36% smaller than in 2005 — meaning the number of young people entering the workforce over the next decade will be more than a third smaller than it was ten years ago.

People also move toward opportunity. The young gravitate to places with more of it and better benefits, especially the well-paid in tech and finance.

Young people pay more into social insurance, and their importance to a city's social-security system needs no explanation.

China's social insurance is split between national and local funds, with a fairly complicated allocation mechanism. Take pensions. Put simply, the pension contribution deducted from our pay each month goes into the "pool" of the basic pension fund for enterprise employees. Every year, retirees start drawing pensions out of that pool while people still working pay in — a kind of savings deposit. To shore the fund up, the State Council announced last year a plan to transfer 10 trillion yuan of state-enterprise assets into it.

Clearly, how much a local government collects through social insurance decides how much it has to pay out for healthcare, pensions and the rest.

With the population aging and births falling, young people who can save into that pool have become a population no city can do without.

Closer to hand is property itself. The young people a city attracts do not have to earn enough to buy a home on their own. Under China's "4-2-1" family structure, two generations of savings going toward a young person's home is now common. The young people talent policies pull in eventually turn into rising prices and transaction volumes. Developers get the cash to keep running; governments get steady fiscal revenue.

And bringing in whichever people are needed has always been the logic of those who govern.

First-tier cities want the young less — Beijing's points system asks for 7 years and 70,000 yuan a month

Asked how he would spend his Nobel Prize money, Mo Yan said 7.5 million yuan would only buy a 120-square-meter apartment in Beijing. Pan Shiyi immediately asked on Weibo: "Do you have a Beijing hukou?"

For anyone who is not Mo Yan, that is a real question.

From late 2017, Beijing's resident population began to fall, reversing 20 years of growth. NDRC figures show that by November 2018 the population of Beijing's six core districts had dropped by 740,000 — the visible result of clearing out factories, markets and subdivided rental flats on a large scale.

Beijing's earlier restriction required non-locals to work and pay social insurance in the city for five consecutive years before they could buy — and buying still did not bring a hukou. In 2018 the city introduced a points-based hukou policy, a route to residency besides buying a home. The bar was high.

Under the Measures for Managing the Recruitment of Talent issued by the Beijing Municipal Human Resources and Social Security Bureau on March 21: "corporate executives whose taxable income in each of the past three years exceeded eight times the previous year's citywide average wage may apply for a hukou." On Beijing's 2017 average monthly wage of 8,467 yuan, that meant only applicants making more than 70,000 yuan a month qualified.

The bar for finance and entrepreneurship talent was higher still. An applicant's fund management company needed at least 100 million yuan in operating capital and had to invest 50 million yuan in Beijing within three years. Entrepreneurs applying for a hukou had to show their companies had put in at least 50 million yuan of their own money over the past three years.

Shanghai, whose population growth was also starting to reverse, required executives to have paid 1 million yuan in cumulative personal income tax, or invested a cumulative 30 million yuan, before they could apply. On education, applicants needed a doctorate or had to be leading a major national science and technology project.

Housing provident fund loan rules were changing too. Beijing began enforcing a "count the home and count the loan" policy: anyone who owns a home outright, or who once took out a mortgage to buy one, is now treated as a second-home buyer — a smaller loan and a down payment of no less than 60%.

Third- and fourth-tier cities can't win the young, but shantytown money drove property anyway

Open Foshan's Lianjia website: the Zhonghai Jinshawan complex, with 12 sales in the past 90 days, is now listed at 24,000 yuan a square meter — close to prices in the outer districts of neighboring Guangzhou, a first-tier city.

Foshan is only one instance of the runaway price growth in third- and fourth-tier cities over the past few years, and that growth did not come from people moving in. Research by Haitong Securities shows population growth in these cities has held at around 0.3%, below the national average of 0.5% and far below first- and second-tier cities.

Third- and fourth-tier cities, which have almost no purchase restrictions, still cannot attract many people — unless they are coming to retire.

Short-term price rises in these cities, which lose the competition for people, came partly from investment demand and partly from cash-based shantytown renovation.

Shantytown renovation means tearing down housing too old to repair and rehousing the residents. "Monetization" means that instead of being compensated with a new home, as before, they are compensated with cash. Put the two together and you get cash-based shantytown renovation.

Shantytown renovation began in 2005 and did little to stimulate the housing market — until the People's Bank of China created Pledged Supplementary Lending (PSL) as a monetary policy tool.

PSL let local governments borrow long-term, low-interest state money for urbanization. As destocking policies took hold, the share of relocation compensation paid in cash kept rising: only 20% in first- and second-tier cities, but 80% in third-, fourth- and fifth-tier cities, and 100% in some places.

Cumulative PSL disbursements stood at 645.9 billion yuan at the end of May 2015; a year later they had reached 1.5 trillion yuan, more than doubling. By September this year the outstanding PSL balance passed 3.23 trillion yuan.

Large sums flowed to residents as demolition compensation, then flowed back into the housing market. That is why prices in third- and fourth-tier cities kept being bid up without much population inflow. In the first half of 2017, sales growth across 40 key cities was just 4.2% and the four first-tier cities fell year-on-year, while sales growth in third- and fourth-tier cities hit 24.5%.

But this three-year flow of money was tightened in 2018. On June 25 last year, Cailian Press and other outlets reported that China Development Bank had taken shantytown-renovation contract approval away from its branches. Cash-based renovation continued, but on a far smaller scale and scope.

In August 2018, PSL inflows hit their low for the year — just 9.1 billion yuan that month, less than a third of the same month a year earlier.

The turmoil showed up in property stocks at once: the sector index fell 2.45% that day. Anxiety spread through the industry precisely because shantytown renovation — widely regarded as the main force behind price growth in third- and fourth-tier cities since 2015 — was being squeezed.

With supplementary lending approvals tightened and cash compensation halted, it is fair to ask what will fund future growth in a country where land sales dominate public finance and local governments raise half their revenue by selling land.

New-home price caps plus lotteries — two price-control policies that stoked the buying frenzy even further

"Fighting Tooth and Nail" for Price-Capped Homes was the headline People's Livelihood Weekly used for the scramble over capped housing.

In 2018, under the strict "housing is for living in, not for speculation" line, a wave of price-capped homes coming to market drew countless buyers. Twelve provinces — Hunan, Guangdong, Shandong, Hainan, Hubei, Hebei and Jiangsu among them — and more than 70 cities capped prices on new residential sales.

A price-capped home is one where the government has set in advance the maximum and average sale price for the land parcel, turning a new-home price the market should set into a government guidance price.

On paper new-home prices were held tightly down, but resale prices nearby kept rising with demand, and the two inverted. For buyers a capped home became an investment: getting one meant money in hand, and "fighting tooth and nail" was no exaggeration.

Take Nanjing. Last June, Phase 3 of Kaisa City Plaza in Hexi went on sale at an average 30,000 yuan a square meter, while Fang.com data put the resale price of the same project's Phases 1 and 2 at 50,000 yuan a square meter. A buyer of the smallest 87-square-meter unit could resell for an instant 1.305 million yuan; the largest, at 141 square meters, was worth 2.115 million.

A clean 2.115 million yuan on 4.2 million of capital — no financial product can do that. So anyone who could afford a new home, and could actually get one, had little reason not to try for it.

To hold back the crowds pouring into the new-home market, lottery purchases started in Shanghai in 2017 and spread to eight popular first- and second-tier cities, including Shenzhen, Hangzhou, Xi'an and Chengdu.

Chengdu's Xiyuan project, which opened in March 2018, had 229 capped units and drew 12,705 applicants — a win rate of just 1.3%.

Wang Yeqiang, a researcher at the Institute for Urban and Environmental Studies of the Chinese Academy of Social Sciences, said price caps used over a long period will push more marked-up resale homes onto the market.

A lottery meant to allocate homes fairly also became a hole through which power could be sold. On June 5, 35 officials from Xi'an's construction bureau, quality-inspection station and other agencies were removed from their posts en masse for altering the system to reserve new homes for the well-connected.

On top of the lottery came a new definition of "genuine need," meant to protect families who really needed a home from speculators.

But the more patches, the more holes. Changsha issued detailed lottery rules ranking genuine-need families mainly by how long they had held a local hukou and how long they had worked. It looked reasonable — until Phase 4 of Changsha's Guanlan Haifu Garden published its list of qualified genuine-need buyers and a large number of people over 70 appeared on it.

Driven by genuine need and speculation at once, the sheer number of buyers turned the lotteries into a game with worse odds than the actual lottery. When Chengdu and Nanjing brought in lottery purchases, 30,000 people once queued for just over 1,000 homes, each carrying a bank certificate for more than a million yuan to prove they had the money; win rates at some Nanjing and Changsha projects were 11.6% and 9.5%.

"Sincerity deposits" of up to 17 million yuan became the new bar for buying — which only encouraged the rich to invest

On May 27, 2018, word got out that Shenzhen's Sea World Twin Seals Garden required prospective buyers to pay a sincerity deposit before they could even enter the lottery — 5 million yuan. Several Shanghai projects asked for more than 2 million, and Hangzhou's Liu'an Xiaofeng went as high as 17 million.

A deposit is a developer's way of shrinking the pool of buyers and raising the win rate. In theory it should not exceed 20% of the purchase price. But as the market ran hot, financial checks on deposits of several million yuan — or demands for payment in full — became a bar developers set for themselves.

Deposits shrink the pool of buyers and raise the win rate. But once the government capped new-home prices, the old model of buying land high and selling homes high stopped working: for a developer, a capped home meant absorbing the rising land price directly and losing margin on the sale. Developers who live on fast turnover badly needed buyers to pay in full, or put more down, as quickly as possible to ease the pressure on their cash.

Several million yuan in cash became the new bar for buying a home: you had to assemble the sum before you could even enter the lottery, and you lost the interest on it while you waited. Take 5 million yuan. Money-market funds like Yu'e Bao often return about 4% a year, so leaving that sum with a developer for a 15-day financial check cost roughly 8,000 yuan in forgone interest; on 17 million, about 28,000.

With an average win rate of 9%, a buyer had to enter at least four lotteries to lift the odds of winning to one in two — a cost of tens of thousands of yuan, sometimes more than a hundred thousand. The queues for financial checks stayed long anyway: the gap between new-home and resale prices dwarfed the lost interest. The deposit bar did not keep investors out.

Companies were barred from buying homes — but 47% of A-share firms already held property

As of the end of September 2018, of the 3,565 companies listed on the A-share market, 47% — 1,696 of them — held investment property. THS iFind data put the total market value of the buildings they held at close to 1.1 trillion yuan, more than five times the 2010 figure.

The motive is easy to see. Buying and selling a single home routinely leaves a spread above 50%; no industry earns like that. Chinese car manufacturing runs on an 8% margin; LVMH, the luxury group, made 19.5% last year. Even Apple, whose margins are remarkable, managed "only" 38% in the quarter it launched a new phone — Foxconn, which assembles those phones, made 1.62%.

Plenty of loss-making listed companies turned the property they held into a profit. On November 13, Zoneng Electric announced it would sell company property to its affiliate Zoneng Development for 65.6023 million yuan, a deal expected to add 35 million yuan in pretax profit. Zoneng Electric's net profit for the first three quarters of 2018 was 18.6477 million yuan.

Three full quarters of work earning less than half of what one day of selling a building brings in has pushed more companies toward speculating on property. Some individual speculators, meanwhile, began registering companies to buy homes and get around purchase restrictions.

Shanghai Securities News reported that company registrations in Hainan province rose quickly in the first half of 2018, most sharply between April and June, when 16,000 new companies registered, up 52.88% year-on-year. The same thing happened in property hotspots such as Shanghai, Shenzhen and Beijing.

Since 2017, nine cities — among them Beijing, Xi'an, Changsha, Hangzhou, Nanjing, Jiangyin, Shanghai and Shenzhen — have suspended corporate purchases of commercial housing one after another. Haikou is the latest.

Now the loophole of registering a company to buy is being firmly shut. Changsha requires companies to hold a home for five years before reselling; Beijing, three. Shanghai requires a buying company to have existed for at least five years and paid 1 million yuan in cumulative taxes — all aimed at the buyers who spent years using companies to dodge purchase restrictions.

Taxes on a corporate purchase run far above those on an individual one. Suppose a company and an individual each buy a 100-square-meter home for 10 million yuan and sell it five years later for 20 million: the company owes at least 5.5183 million yuan in taxes and fees, the individual just 470,000. Whether a home bought today will rise that much in five years is another matter.

Policies came fast — and changed faster

The Centaline Property Research Center counted 450 property control policies nationwide in 2018, which across a bit more than 220 working days works out to two policies a day somewhere in the country. In all of 2017 there were 250.

But policies also reversed fast in 2018. Tianjin adjusted its rules four times in 72 hours; Hainan province went from the strictest purchase restrictions to a loose talent-residency policy within a single month.

At the end of the year the most dramatic reversal came in Hengyang, a third-tier city of 7 million in Hunan province that became the focus of the property market's final weeks.

On December 26, 2018, Hengyang decided to suspend, from 2019, the price-cap policy it had introduced two years earlier. Less than 24 hours later the Hengyang municipal government swiftly killed the easing, saying the housing bureau had misjudged how complicated holding home prices steady really is.

And the controls themselves are becoming one policy per city

The last control policy of 2018 to cause a stir came on December 18, when Heze, in Shandong, announced it was scrapping the rule set the previous year requiring homes to be held for at least two years before resale. Yan Yuejin, research director at the think tank center of the E-house China R&D Institute, called it the opening shot of a loosening housing market.

It is the leading example of the Ministry of Housing and Urban-Rural Development's new "one city, one policy" approach to control.

For years the central government's tightening and loosening of property moved in near-unison across the country. The old and new "Eight National Rules" of 2005, then the "Six National Rules" and another "Eight National Rules," were all nationwide guidance.

The 2008 controls worked through down-payment ratios and loan rates, with the central bank cutting rates three times in a year. After 2010, policy grew more granular: the State Council, the Ministry of Finance, land bureaus and the NDRC each issued their own measures, setting conditions on social insurance, personal income tax records, hukou, even marital status. Later still, resale and lending restrictions became the key tightening tools of 2017.

The tools of control multiplied and grew finer. As a developer who has worked in Hangzhou for years put it last year: "Real estate is already a planned economy — that's a reality we need to face. From the moment you take the land, the government decides your highest price and your lowest. Once a developer has the land, the government decides how long you have to build it and bring it to market. Even the price you sell at when it hits the market — the government decides that too."

That national rhythm held for years: down-payment ratios and loan rates in 2008; conditions on social insurance, personal income tax records, hukou and marriage added after 2010; then resale and lending restrictions, all of them nationwide. As growth in floor space sold by the three biggest developers stalled in 2018 and more local land auctions drew no bids, region-by-region adjustment — "one city, one policy" — became more common.

On Heze's scrapping of the resale rule, Shandong's provincial housing department said it had not known about the decision but that it does not interfere in the specific policies of local housing bureaus: local property controls stay in line with national policy, using measures set city by city.

Behind it lies the local government's huge fiscal gap. In 2017, the gap between Heze's revenue and spending reached 32.3 billion yuan, close to two years of the city's revenue. It urgently needed a project that could produce a large stream of fiscal cash fast. In China that project is, without question, real estate.

Centaline Property data show that Heze's land sales brought in 26.3 billion yuan in 2017, up 312.54% year-on-year — fourth among all cities in Shandong that year.

This city, near the bottom of Shandong's per-capita GDP table, posted first-quarter GDP of only 71 billion yuan, and total fiscal revenue of just 18.66 billion yuan in 2017. It leans heavily on income from land sales, and tightened shantytown money plus developers' caution about buying land in third-tier cities pushed Heze to become the first city to loosen its resale rule.

Almost at the same time as Heze's easing, Zhuhai relaxed the social-insurance requirement for buyers without a local hukou, and on December 19 Guangzhou posted a notice on its official website loosening purchase restrictions on retail and office property.

As with the policies Lanzhou, Hefei and Nanjing brought out at the start of 2018, all three moves were read as the start of a new round of loosening in the housing market.

And as then, no one believes home prices will really be allowed to fall. With that expectation in place, people buying a place to live became investors too, spending their savings and taking on a million yuan of debt — it still looks like the only reliable investment. No one thinks they will be the one left holding the last baton; or rather, they figure that even if prices do fall, they won't lose much.

Graphics: Feng Xiuxia

Cover image: CityScape