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China's Real Estate Market in 2007: Macro-regulation Policies and Assessment of their Effects*
2008-08-12
Ren Xingzhou, Institute of Market Economy of DRC
Research Report No.016, 2008
In 2007, China's real estate sector maintained a rapid growth, with investment in real estate development, the nationwide commercial housing investment and the area of sold commercial housing being increased by a wide margin over the previous year. At the same time, problems still existed in real estate market performance. Housing prices went up remarkably, and the housing sales prices in 70 major and medium-sized cities rose 7.6% from a year ago, up 2.1 percentage points over the growth rate of the previous year. Structural problems in housing supply still prevailed and land prices continued to rise. In view of these problems, the Chinese Central Government enacted a series of macro-regulation policies and measures, which played an evident role in regulating the real estate market.
I. Macro-Regulation Policies Implemented in 2007 toward Real Estate Market
1. Macro-regulation policy measures targeting real estate market
(1) Policies of adjusting relevant charges and taxes with regard to real estate development. In January 2007, the State Administration of Taxation promulgated the Circular on the Management of the Clearance of the Land Value Added Tax Among Enterprises Involved in Real Estate Development. According to the circular, clearance of land VAT should be thoroughly carried out among countrywide real estate enterprises from February 1, 2007. Since January 1, 2007, the amount of land use tax in cities and towns would triple the amount as specified in Provisional Regulations on Land Use Tax in Cities and Towns promulgated in 1998. Besides, the newly approved policy, which stipulates that charges for using new construction land would double the previous amount, was officially put into practice.
The aim of adjusting relevant charges and taxes was to strengthen macro-regulation over real estate market through adjustment of taxes. increasing the cost in real estate development and bringing down the huge profits of the real estate developers.
(2) Macro-regulation over housing consumption: the amount of down payment for purchasing a second house was raised. The People's Bank of China and China Banking Regulatory Commission jointly promulgated the Circular on Strengthening the Management of Commercial Real Estate Loans on September 27, 2007, prescribing that the proportion of the down payment to the total price of housing would be raised by at least 40% for those loan applicants who have already used loans to buy a residence and the interest rate charged for the new loan would be raised by at least 1.1 times of the bench mark interest rate for the same type of loans during the same period. In order to carry out the policy in real earnest, the People's Bank of China and China Banking Regulatory Commission again jointly promulgated the Additional Circular on Strengthening the Management of Commercial Real Estate Loans in December of the same year, making it clear that a family (including the borrower, his or her spouse and their minor children) would be regarded as one borrower when banks decide the number of times of the borrower applying for housing loans, thus improving commercial banks' practice for judging second-time housing loans and intensifying the effect of the policy.
Such a regulative policy was meant to restrict the purchase of houses for investment purposes and lower the growth rate of housing prices by increase the cost of speculation in real estate market through containing bank loans and raising the ratio of the down payment for purchasing a second house. In particular, by taking every family as a basic unit to decide the number of times of the borrower applying for housing loans, the government has standardized the conditions for the implementation of the policy.
(3) Macro-regulation over land market. In January 2007, the Ministry of Land and Resources issued the Circular on Adjustment of the Examining and Approving Procedures of Urban Construction Land Reported to the State Council for Ratification. It specifies that within the limits of the urban construction land as specified by the Overall Planning for Land Use, the implementation by the State Council in examining and approving land requisition and change of agricultural land for other purposes in batches and in turn has been changed into the implementation by provincial people's governments in submitting the applications to the State Council for examination and approval every year. Such a policy signifies that the right for the examination and approval of the use of construction land and the relevant responsibility previously wholly belonged to the central government have now been given to provincial governments, which has stepped up the responsibility of provincial governments for verifying the use of construction land and strengthened the responsibility of local governments.
In August, five ministries and commissions under the State Council including the Ministry of Land and Resources, Ministry of Finance and Ministry of Construction jointly issued the Circular on Overhauling the Transfer of the Right for Use of State-owned Land and decided to spend half a year's time to carry out a nationwide inspection on the transfer of the right for use of state-owned land, targeting each and every piece of construction land supplied from 2005 to 2007.
In October, the Ministry of Land and Resources promulgated the Regulations on the Transfer of the Right for Using State-owned Construction Land through Auction, demanding that from November 1, 2007, the assignee must pay the total amount of price for the whole piece of land before receiving the license for using state-owned construction land.
In November, among all urban construction land reported to the State Council for examination and approval in 2007, the area number of unapproved land in various localities accounted for 31.81%.
In December, the Ministry of Land and Resources, Ministry of Finance and the People's Bank of China jointly promulgated the Measures on Management of Land Reserves, rigorously stipulating the terms and conditions for land reserve agencies to apply for loans and mortgage loans, the limit of the size of loans for land reserve agencies and relevant management measures.
The above-mentioned policy measures reflected the determination of the Central Government to further strengthen land management and to strictly control the supply of land. Such measures are aimed at effectively preventing developers from deliberately hoarding land for speculation and driving up prices. They were also aimed at improving the land reserve system, improving the land market and promoting the frugal and intensive use of land, so as to play an important role in keeping the reservation of 1.8 billion mu of land and in restraining the sharp rise of land prices.
(4) Macro-regulation over real estate market order. In January 2007, the Ministry of Construction and the People's Bank of China jointly promulgated the Circular on Strengthening the Management of Real Estate Brokerage and Improving the Management of Transaction Clearance Accounts, stipulating that the real estate brokers or transaction guarantors must open transaction clearance deposit accounts for the storage and transfer of the stock housing clearance funds, and that the transfer of funds must be conducted by means of bank transfer instead of cash payment. In March, the Ministry of Construction, jointly with six other ministries and commissions such as the Ministry of Land and Resources, Ministry of Finance, State Administration of Taxation, National Development and Reform Commission and the National Audit Office, conducted an overhaul of the real estate market order, aimed at enhancing the supervision over the real estate market, exercising audit and examination of the real estate development enterprises, and cracking down on illegal practices in real estate development, construction and transactions in accordance with the law. The overhaul was started in March 2007 and lasted for a year.
The implemented policies and inspection were aimed at further straightening out the real estate market order, regulating the activities of developers and intermediaries in the real estate market and improving the market environment.
(5) Macro-regulation over foreign investment in real estate sector. In March 2007, the Ministry of Commerce issued the Guidance on Nationwide work of Utilizing Foreign Investment in 2007, demanding that effective measures should be adopted to strictly restrict foreign investment from entering China's real estate sector. On June 11, the Ministry of Commerce and the State Administration of Foreign Exchange jointly promulgated the Circular on Further Strengthening and Improving the Examination, Approval and Supervision of Foreign Direct Investment in China's Real Estate Sector, stipulating that any foreign investment in the Chinese domestic real estate sector shall go through examination and approval and that the establishment of any foreign real estate companies examined and approved by local authorities in the future shall be reported to the Ministry of Commerce and put on records.
The promulgated policy as mentioned above was aimed at preventing large amounts of foreign hot money from flowing into China's real estate market and producing negative impact, so that the gap between supply and demand on real estate market can be reduced.
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