Housing market on fire, authorities try to hose down prices
Shanghai’s property market blows hot and cold. When the market cools, the government steps in to facilitate homebuying; when it gets frothy, the brakes are applied.
On January 21, the city government tapped the brakes with a series of new directives.
Florence Gu, a 40-something worker in the finance department of a state-owned conglomerate, spent one afternoon in early December accompanying a friend who was seeking to buy a home. They went from one sales office to another in downtown Xuhui District, looking at prospects. The prices were jaw-dropping,
"The housing market has simply gone crazy,” said Gu. “I think it’s good the government stepped in, though it’s still a bit early to know how far these new measures will go in cooling down the market."
The latest government measures, announced by the city housing authorities, stipulate that couples who have been divorced for three years or less are only eligible to buy homes based on the circumstance that existed when they married.
It means, in effect, that if a couple owned two houses before their divorce, then either party will not be allowed to purchase a home within three years of the divorce.
Under the city's current home-purchase restrictions, local families are allowed to purchase two residential units at most, while non-local families are entitled to up to one home.
Moreover, a capital gains tax on the total sales price of a property will be imposed if the house is sold within five years of purchase, up from the previous two-year bar.
Under the new policy, homes owned for longer than five years will draw capital gains tax on any profit from their sale if the property is defined a “non-ordinary.” No capital gains tax will be imposed if a residence is deemed “ordinary.”
In Shanghai, “ordinary” homes are defined as those no larger than 140 square meters and priced at less than 4.5 million yuan (US$695,045) within the Inner Ring Road; or below 3.1 million yuan if located between the Inner and Outer Ring Roads; or below 2.3 million yuan if beyond the Outer Ring Road.
The change essentially means a hefty cost increase for homebuyers of existing properties sold within two years but less than five years of purchase because sellers will take capital gains tax into account.
"Local authorities are constantly adjusting policy framework based upon market conditions and feedback to previous measures," said James Macdonald, a senior director of Savills Research China. "Some of the policies look to close loopholes misused for speculative investments, while continuing to support first-time buyers."
Shanghai's residential property market proved resilient last year despite the novel coronavirus pandemic. The market gradually returned to normal in the second quarter when the height of the outbreak abated.
In April, for example, the volume of new residential properties sold, excluding government-subsidized affordable housing, jumped 62 percent from the previous month to 5,286 units in Shanghai.
In the existing housing market, some 25,000 homes changed hands that month, also an increase of 62 percent from March, according to Shanghai Centaline Property Consultancy Co, a major rental and estate agent in the city.
For the whole of 2020, 80,300 units of new housing and 301,000 units of existing housing were sold, up 23 percent and 27 percent, respectively, according to Centaline.
"The existing housing segment, which better reflects the real local property market, remained hot in recent quarters, with monthly transactions above 25,000 units since May, reaching a peak of 39,000 units in December,” said Lu Wenxi, a senior researcher at Centaline, who noted that was the highest volume since 2016.
"The city's accelerated pace of renovating old residential communities and unmet demand from both first-time buyers and people seeking to move up the housing ladder probably contributed to the panic buying," Lu said.
Gu is still shaking her head in disbelief about her tour of the housing market in December.
"One of the projects we visited that afternoon was on the Xuhui waterfront and had a starting price of around 15 million yuan per unit,” she recalled. “Yet all its 200-plus units were fully subscribed on the first day they came on the market, with few seeking mortgage loans. Wasn't that mad?"
Not long after, a new residential project in Qiantan, an area dubbed the “second Lujiazui" in the Pudong New Area, had 2,583 prospective buyers vying for purchase rights to 204 fully decorated apartments.
"Some existing high-end projects of similar quality in the same area available on the market right now could be 20,000 yuan or even 30,000 yuan per square meter higher in price than new ones in some extreme cases," Gu conjectured.
Analysts and homebuyers seem to have mixed opinions on how the latest measures will impact the market.
"The new policies should be effective in curbing the overheated market in some parts of the city exhibiting signs of property speculation," said Chen Jie, director of the Center for Housing and Urban-Rural Development at Shanghai Jiao Tong University. "I think this package of policies, each targeting different situations, will work as a whole."
But Tony Liang, 35, who owns an apartment in the city, is not so certain.
"The real reason behind the recent mania in new homebuying is the price gap between new and existing homes, which is not covered by the new policies," he said.
The local housing authority’s new measures also target new housing developments in the outlying areas of Nanhui, Fengxian, Songjiang, Jiading and Qingpu, and in rural areas close to Metro stations. A new "lucky draw" mechanism to determine homebuyers will prioritize people who don’t own homes in the first round.