Letting steam out of housing market while meeting buyers' needs

For many, the last day of the year is a time to look forward to a new year that hopefully is full of hope and joy.

However, what Laura Qiu, an avid home-seeker in Shanghai, remembers about the eve of 2022 is, unfortunately, a text message from a local real estate developer which brought her nothing but a bitter sense of defeat again.

In fact, it was the fourth such message Qiu had received from developers over the past year, which shared one thing in common by declaring she was judged disqualified for a "lucky draw." This is a system adopted in Shanghai which is triggered when too many prospective homebuyers are chasing too few units in new housing developments.

"Lady Luck must not be on my side as all my four endeavors to enter a 'lucky draw' ended up in vain," said the 36-year-old new Shanghainese, who is originally from southeastern Fujian Province. "Shall I give it another shot or simply take a step back with my Plan B to buy a lived-in dwelling?"

Sitting on several million yuan of cash for a down payment since early 2021, Qiu is one of those who have been desperately stymied by a scoring system that Shanghai introduced in February 2021.

Prospective buyers need to compete against each other first under a point system to get into the "lucky draw" which in turn determines the order of purchasing rights. The point system favors those 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 another factor, that is, how many years a prospective buyer has worked in Shanghai since January 2003, as verified by social security insurance payment records.

Initially, the mechanism is activated when the ratio of interest is 130 or more buyers for every 100 available units, and under revised policies implemented since late August, three more ratio options – 180, 200 and 250 – became available to developers, a move designed to allow more home-seekers access to the lucky draw.

In the meantime, how many extra points a potential buyer can get also started to vary from project to project, ranging from 0.1 point to 0.24 point per month based on the social security insurance payment record.

"Momentum among new home-seekers remains robust in Shanghai despite a slew of tightening measures aimed at curbing overheating in the housing market, which could be best exemplified by the high proportion of projects which saw the triggering of a scoring system to determine entries to the 'lucky draw,'" said Lu Wenxi, a senior researcher at Shanghai Centaline Property Consultants Co, a major brokerage chain in the city.

"Fears that home prices would go further northward as inflation expectation persists, real estate as an ideal hedge against inflation, strictly capped new home price which heralds prospective gains (as compared with lived-in units sold at market prices), as well as continuous inflow of talent from other parts of the country as a significant source of demand, have jointly fuelled the market."

According to a Centaline calculation, the scoring mechanism was triggered at 114 out of the 224 new housing developments launched for sale around the city between March and October 2021 over a total of five batches, accounting for 50.9 percent of the total.

During the 12-month period ended in December, new home sales, excluding government-subsidized affordable housing, piled up to 10.52 million square meters in Shanghai, an increase of 12.9 percent from 2020, with January, March and June being top three performers passing the 1-million-square-meter mark, Centaline data showed.

The double-digit expansion was sustained by adequate new supply, which saw a total of 190 projects rolled out onto the local market. New homes launched for sale across the city totaled around 8.06 million square meters in 2021, a year-on-year rise of 8.2 percent, according to Centaline data.

Latest research released by major international property consultancy Savills showed that the supply/demand ratio for new homes (excluding villa projects) stood at 1:1.37 in Shanghai last year, compared with 1:1.25 in 2020 and 1:0.95 in 2019, indicating continuously rising demand for new apartments across the city.

While the new housing market remains a hard-fought battle with no signs of cooling anytime soon, many "low-score" players, or the less-privileged buyers under the current new home purchase mechanism, placed their bets on the "unbiased" lived-in market which registered a somewhat "roller-coaster" ride over the past year.

"Pre-occupied apartments seemed to be my only option if I want to climb on the property ladder," said Daisy Wang, a single 30-something white-collar who has been working in Shanghai for about six years after acquiring her master's degree in the UK. "With my parents' aid, I finally landed my first home in Shanghai which I would call a '7 point' purchase on a scale of 1 to 10."

Embarking on her home search in December 2020, Wang had checked more than 40 existing apartments located within the Outer Ring Road, a non-negotiable requirement for the PR professional, before settling down in June 2021 on a 70-square-meter apartment on Zhenbei Road in downtown Putuo District. Built in the late 1990s, the two-bedroom unit, sitting on the fifth floor of a seven-story building without elevators, cost her a total of around 5 million yuan (US$789,000) including tax and fees.

"To strike a home purchase deal in seven months is pretty quick and I consider myself lucky to wrap almost everything up before new tightening measures were imposed in the city to rein in the overheated pre-occupied market, which immediately affected the inventory of existing homes," she said.

What Wang referred to were a series of measures launched in Shanghai since July 2021 which mainly include verification of existing home prices and tightening mortgage loan approvals at commercial banks.

In early July, the Shanghai Housing Administration Bureau ordered the list price of every pre-owned home be verified by the local industry watchdog based on the normal range. Those who fail to pass the verification won't be allowed to be publicly listed for sale, a move industry analysts said would "effectively lower home-seekers' expectations on property prices."

Less than a month later, the lived-in housing market was hit with another heavy blow when banks were told to approve mortgage loans based on the lowest of three prices: the contract price, the price assessed by the bank, and the price verified by the real estate transaction center – which is often much lower than the other two prices.

That means, home-buyers either need to set aside a significantly increased amount of money for a down payment, or have to cut their budget and turn to less expensive units.

The existing housing market made an immediate response to these two measures with sales of pre-occupied units plunging to an all-year bottom of 12,000 units in September, which was in sharp contrast to nearly 45,000 units in January and an average of around 29,000 units during the first seven months of 2021.

"While 2021 was off to an extremely strong start as robust momentum extended from the last few months of 2020, the market came to a sudden brake in September, with monthly sales sliding to a level last seen in 2017, which was a multi-year low," said Yang Yulei, a senior analyst with Shanghai Homelink Real Estate Agency.

"However, we saw signs of stability in December when transaction volume recovered to around 18,000 units, almost a normal level in Shanghai."

Between January and December, some 281,000 lived-in units, valued at 928.2 billion yuan in total, changed hands across the city, a year-on-year decrease of 7 percent and 8 percent, respectively, according to Homelink data. These existing homes cost an average 3.31 million yuan, or 40,219 yuan per square meter, both down 1 percent from a year ago.

For 2022, "stability" will remain the key word for Shanghai's housing market.

A statement posted on the city's official housing website (www.fangdi.com.cn) on January 21 reiterated that Shanghai will continue to increase housing supply, adopt measures to adjust housing demand, strengthen supervision of the property market, and stick to its plan to establish a housing system that encourages both house purchases and rentals, as it proceeds with its commitment to a stable and healthy real estate market.

"Shanghai's overall housing policy stance will remain tight in 2022, although marginally looser monetary policy is expected," said Sherril Sheng, research director, JLL China Residential Sector. "We expect sales volume in the mass market to remain stable, underpinned by solid demand from first-time buyers and upgraders."

And for prospective buyer Qiu, the new year means more opportunities to try her luck.

"I just gave my fifth try for a project in the Pudong New Area and the good news is that the sales person told me the other day that my chances to get enrolled in a lucky draw are pretty high," she said. "Who knows? Maybe this time, Lady Luck will finally be on my side, right?"

Major housing policies in Shanghai in 2021 for new market

• The number of homes owned by people who have been divorced for less than three years is calculated based on what it was like when they were married.
• A capital gains tax on the total sales price of the property is imposed if the house is sold within five years of purchase, up from the previous two-year barrier.
• Introduction of a scoring system in new home purchase and a ban on home owners to sell their property within five years if they are entitled to the purchase at projects where a scoring system is triggered.

Major housing policies in Shanghai in 2021 for existing market

• The list price of every pre-owned home is ordered to be verified by the local industry watchdog based on the normal range, and those that fail to pass the verification will not be allowed to be publicly listed for sale.
• Banks are required to approve mortgage loans based on the lowest of three prices: the contract price, the price assessed by the bank, and the price verified by the real estate transaction center – which is often much lower than the other two prices.