Amid a robust housing market, feet slipped off the property ladder

Cao Qian
The city government has imposed new clamps on homebuyers. Are they enough to cool down a market that got off to a roaring start this year?
Cao Qian
Amid a robust housing market, feet slipped off the property ladder

Residential buildings in Shanghai.

After years of saving money and with some aid from her parents, Julia Zhou finally managed to accumulate 3 million yuan (US$461,600) in her bank account. She figured that would be enough to make a down payment on a decent, moderate-size new apartment on the outskirts of Shanghai.

But when her home search began, her heart sank and her foot slipped from the property ladder.

"Frankly, I didn't expect it to be so hard to find a two- or three-bedroom apartment that I liked and could afford," said Zhou, who is in her mid-30s and works as a marketing manager for a Global Fortune 500 company. "The more housing projects I visited, the more I realized that I might have to settle for something I didn't really want or just give up my plan to buy a home altogether."

It's not that there weren't apartments she liked and homes she could afford. Rather, Zhou was stymied by a new scoring system introduced in Shanghai in February. It created a "lucky draw" system, triggered when too many prospective homebuyers are chasing too few units in new housing developments. A point system is used to determine who gets into the draw, which in turn determines the order of purchasing rights.

The mechanism is activated when the ratio of interest is 130 or more buyers for every 100 available units.

The point system favors home seekers who have Shanghai permanent residence permits, who are married, who currently own no home and who haven't purchased a home in Shanghai within the past five years. That gets them 60 points.

Extra points are awarded for more factors, including how many years a prospective buyer has worked in Shanghai since January 2003, as verified by social security insurance payment records.

Zhou, who has been living in Shanghai for more than 10 years and is single, did manage to accrue 62 points, but even that wasn't good enough to get her into a draw for the most popular housing developments in outlying areas.

In late March, for instance, a project developed by Seazen Holdings Co in suburban Minhang District, located about 25 kilometers from downtown Shanghai, attracted 1,145 interested buyers, including Zhou, who were competing for purchase rights to 328 fully decorated apartments.

The units had an average price of about 40,000 yuan (US$6,204) per square meter. The oversubscription rate was about 2.5 times.

Under the new scoring system, 441 interested buyers with a minimum 66.2 points were finally declared qualified to participate in the lucky draw. That left Zhou and many others out in the cold.

Around the same time, another residential project near Sijing Metro Station in outlying Songjiang District had 282 potential buyers competing for 128 new apartments selling at an average price of over 46,000 yuan per square meter. That translated to an oversubscription rate of 1.2 times, with 68 points declared as the minimum score for entry.

As of mid-May, the point-based system has been triggered at about 12 projects in Shanghai. One housing development in Jinqiao in the Pudong New Area recorded the highest bar at 75.6 points, while one in Jiading District as the lowest at 40.9 points.

Why has homebuying in Shanghai become so complicated? One reason is enduring demand no matter what the price.

"Strong sentiment from first-time buyers and those upgrading homes carried into the first quarter of 2021, with new home sales rising 6.4 percent quarter over quarter to 3.2 million square meters, the highest quarterly figure since the last three months of 2016," said Sherril Sheng, research director, JLL China residential sector.

Indeed, Shanghai's new home market closed 2020 on a high, with sales of new residential properties, excluding government-funded affordable housing, rising to 1.22 million square meters in December.

That strength extended into January, when transaction volume soared to a 53-month high of over 1.43 million square meters, according to Shanghai Centaline Real Estate Consultancy Co.

The market hit the brakes temporarily in February because of the Spring Festival holiday, but buying momentum rebounded quickly in March, when new home sales topped 1.1 million square meters. A correction in April cooled the monthly figures down to 767,000 square meters.

"We expect the new residential market to maintain healthy sales momentum through this year," Sheng said. "New tightening measures launched in the quarter should be helpful in curbing speculation and stabilizing market expectations."

In addition to the point system, Shanghai has also announced other policies this year aimed at curbing overheating in the housing market. They include tighter restrictions on divorced homebuyers and a capital-gains tax on the sales of property sold within five years of purchase.

The policies also tighten management of personal housing loans and an intensified crackdown on the illegal flow of consumer loans and business loans into real estate.

With the new homes market so hard to crack, it comes as no surprise that homebuying fever is now spilling over into the existing homes market, where sales exceeded 95,000 units in the first quarter, according to global property consultancy Savills. That figure was pretty jaw-dropping when compared with the city's norm of around 20,000 existing units changing hands every month.

In the January-March period, sales of existing homes totaled 7.78 million square meters, up an eye-popping 263 percent from a year earlier, Savills research showed.

"The surge was primarily caused by fears that housing prices might go further northward," said Lu Wenxi, a researcher with Shanghai Centaline. "With no fundamental change on the demand side and mortgage loan policies remaining tight, the market should return to more normal levels as housing supply grows and home seekers are less prone to grab any deal."

Philip Yao, who turns 40 next month and currently lives with his wife and young son in a rented apartment in Tangqiao in Pudong, said he wants to buy a home for his family but will wait a bit and hope the market cools down.

"My agent called me the other day saying the owner of a home we were interested in has recently lowered his asking price a bit, and there might be some room for price negotiation," said Yao, who has been seeking a two-bedroom apartment built after 2000 and within walking distance of a Metro Line 6 station for the last six months.

"Luckily," he added, "I don't have a tight deadline. But I do want to purchase a home as soon as possible because I am sitting on several million yuan of cash for a down payment, and that is vulnerable to inflation."

Sales of existing homes in April fell 39 percent from March to around 24,000 units, according to the latest monthly report from Shanghai Homelink Real Estate Agency.

"Despite a significant retreat, that's still a quite strong performance and means there is limited room to negotiate prices," Centaline's Lu said. "I find more owners are willing to negotiate prices if sales fall below the 18,000-unit level for several consecutive months. I guess that could be viewed as rather subdued momentum."

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