It has been over two months since the Central Government announced the “Five New Measures” in early March. How have these measures worked so far? The new round of tightening policies was aimed at taming housing price growth by addressing several key issues, such as continuing to implement HPRs, increasing the supply of small- to medium-sized apartments and discouraging investment purchases by increasing transaction costs. As we stated right after the announcement, the new measures remained consistent with the structure of the existing policy regime, and the emphasis was placed on the detailed implementation of the measures at the local level.

Following the announcement from the Central Government, many city governments waited until the end of March to reveal their local implementation details. However, most of them failed to address some of the key issues, and Hainan Province even refused to implement the new measures. At the time of writing this article, only the Beijing city government had enforced the implementation of a 20% capital gains tax, while the governments of cities like Shanghai and Guangzhou have not given an explicit timetable for implementation.

It has long been our view that there are sufficient government policies in place in China to help stabilise the market. It is the lack of enforcement and strict implementation of those policies that has led to the problem of prices rising too quickly. A good example is the HPRs, which were introduced in over 20 cities in 2011 but got gradually loosened throughout 2012. Local governments at the city level have been very reluctant to enforce national policies as their revenues have a heavy dependence on the real estate industry, with land sales being a key revenue source.

Sales volume across the major cities started trending downward in April. We believe this will result in a stabilisation in prices over the next few months if sales remain subdued. However, this volume slowdown is due to a spike in activity before the local governments made their announcements at the end of March rather than because enforcement and implementation are more strict. Over the past two years, the market has been driven primarily by first-time homebuyers and upgraders, who are the participants the government should and will continue to support. Investors and speculators can be kept out of the market as long as the existing measures are enforced and implemented strictly at the local level. An additional policy we think is needed for the long-term sustainability of the sector is the property tax, which would help rationalise purchase incentives and create a steady revenue stream for local governments, reducing their reliance on land sales.

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