After China’s third plenum of the 18th CPC Central Committee ended a week ago in Beijing, the CPC released a broad and comprehensive plan for economic reform last Friday. The plan addressed several issues related to the property sector, including land form, Hukou reform and property tax, although which cities and when a property tax might be expanded to remain uncertain. In the past two weeks prior to the plenum, Beijing, Shanghai, Shenzhen and later on Guangzhou (China’s four tier 1 cities) preemptively announced new tightening measures to counter the large price increases seen this year. The table below summarises the latest policy in the four cities.

Source: Local Governments, Jones Lang LaSalle

The rollout of these new measures was against the backdrop of the acceleration in housing price witnessed over the past several months in the tier I cities in China. For example, in Shanghai high-end residential prices posted a q-o-q growth of 2.7% in 3Q13, up from 0.3% in 2Q13. However, we expect the new measures will only have a very limited impact on the residential market in the three cities for several reasons.

• First and foremost, the market has been primarily driven by strong demand from first-time home buyers, not speculators or investors, since the HPRs were first implemented in 2011. Compared to most tier II and III cities, the tier I cities, like Shanghai and Beijing, are becoming increasingly attractive to college graduates from other cities and provinces due to greater job opportunities and higher potential for career growth. As a result, the tier I cities see thousands of immigrants each year, which provide a steady pool of potential first-time buyers in addition to household formation drivers among local residents.
• Secondly, in contrast to the consistent buying demand, new supply is trending downwards gradually in the tier I cities as the cities develop and land available for future development decreases. Although the new measures tried to address this issue by increasing the land supply, it will take several years for these land plots to be developed into a meaningful supply to the market.
• Last but not least, it has long been our view that there are sufficient 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 20% capital gains tax which was introduced by the central government in March this year, but has been enforced and implemented only in Beijing so far as we know.

In sum, the new tightening measures might weaken market sentiment and thus result in a decline in sales volume in the short term, but are unlikely to reverse the current trend in housing prices. For the long-term sustainability of the market, we think the expansion of property tax scheme is one of the measures which will be needed; this would help rationalise buyers’ purchase incentives (vs. leasing) and reduce local governments’ reliance on land sales.

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