CHINA - Media OutReach - 13 March
2020 - Real
estate is a key driver of the Chinese economy, and a popular
choice of investment among the country's consumers. The huge demand for real
estate has contributed to a consistent rise in property prices in China in
recent years. The latest National
Bureau of Statistics data shows that new home prices in
first tier cities increased 3.8% year on year in December, while they increased
7.3% and 6.7% year on year in second and third tier cities, respectively. The
Chinese government has announced a variety of measures to make homes more
affordable for ordinary Chinese citizens. However, a recent research study by
The Chinese University of Hong Kong (CUHK) Business School shows some of these
measures may not be that effective.
The study, entitled "Using
purchase restrictions to cool housing markets: A within-market analysis",
was conducted by Prof.
Yang Yang, Assistant Professor of School of
Hotel and Tourism Management at CUHK Business School, in collaboration with
Prof. Tsur Somerville of Sauder School of Business at the University of British
Columbia and Prof. Long Wang of the School of Entrepreneurship and Management
at ShanghaiTech University. It found that restricting the total number of
properties that a buyer may purchase had a substantial and immediate effect on
transaction volume but no statistically significant impact on residential
According to a Mckinsey
report, the average household in China is
more likely to concentrate their assets in real estate than elsewhere in the
world. For example, 62 percent of average household assets there are in real
estate, whereas households in Japan and the United States only allocate 38
percent and 28 percent of their assets in real estate, respectively. In order
to curb speculation and to contain property prices, the State Council issued
two directives, the Ten National Rule and the Eight National Rules in 2010 and
The two directives include changes
to the Housing Provident Fund underwriting to lower the maximum loan to value
ratio for purchases of residential property greater than 90 square metres and
the increase of minimum down payments on loans from commercial banks as well as
raising the minimum interest rates for mortgages. The number of properties an
individual could purchase was also restricted. However, the State Council did
not release a universal implementation timeline and specifications, which means
it was up to the local governments to customize these policies and implement
them according to local economic conditions.
The latest study sought to measure
the effectiveness of restrictions on the number of properties a buyer may
purchase in calming housing markets, lower asset bubble risk, and improve
affordability. Unlike macro-prudential measures relating to mortgage interest
rates, underwriting criteria, or access to credit, such quantity measures were
not imposed on all significant cities and applied to all buyer types. Purchase
restrictions were instead enacted with variation: some cities did not introduce
restrictions at all, while others implemented restrictions that varied by
district within the city, said Prof. Yang.
"For instance, Guangzhou
allowed those with hukou to purchase
an additional unit, but forbad any purchases by non-residents; Shanghai allowed
both to purchase just one additional unit; and many other cities limited
residents to two units and non-residents to one. In addition, not all cities
imposed purchase restrictions, and of those that did so, some did not impose
them uniformly throughout all the districts in the municipality or county,"
Prof. Yang explained, adding that the team had selected four cities that
imposed restrictions on some districts but not on others for their analysis.
The four cities were Chengdu,
Guangzhou, Hefei, and Qingdao. Guangzhou is a first tier city whereas the
others are second tier cities. All four cities have at least two districts
without quantity restrictions on resident and non-resident buyers. The purchase
restrictions were introduced on different dates in the four cities: Guangzhou
introduced policies on October 15, 2010; Qingdao on January 31, 2011; Chengdu
on February 15, 2011; and Hefei on March 31, 2011.
The researchers gathered their data
from the Chinese Real Estate Index System (CREIS), which records housing
transaction data in China from information published by the central, provincial
and local governments for new units sold by developers to end buyers. The team
analysed 2014 projects in the four selected cities. According to Prof. Yang,
such within city variation rather than comparing restricted and non-restricted
cities could give them a clearer picture of the effectiveness of the policies
as both restricted and non-restricted districts of a city share the same
general housing and labour markets and the same local economy.
Volumes Vs. Property Prices
According to the results, quantity
restrictions had a substantial and immediate effect on transaction volume. In
the six months following the introduction of quantity restrictions, transaction
volumes in districts within a city that had purchase restrictions fell over 40%
relative to volumes in un-restricted districts. Over time, this difference
narrowed to 30% for a 12-month window and 24% for a two-year window. However,
the effect of quantity restrictions on home prices is a different story.
"The stated objective of the
restrictive policies was to tame high and accelerating house prices and calm
markets. We find little evidence that the purchase restrictions resulted in
price declines, though market activity clearly declined," says Prof. Yang,
adding that while other researchers find price declines in cities with
restrictions of up to 16% compared to those without, they found no differential
change in prices across districts.
Prof. Yang said there are a number
of possible behavioural explanations for such results. For instance, while the
buyers were affected by the restrictions, the developers did not drop prices,
suggesting they might expect the policies to be temporary so that they could
sell the properties at more profitable prices after the restriction period.
A separate analysis also found that
local governments did not reduce the supply of land in districts where property
purchase restrictions were introduced. Land prices, the number of parcels
auctioned, and the buildable potential all were unchanged when comparing
districts with restrictions and those without.
"This pattern is consistent
with developers who see the government policies as temporary, to be reversed
after some period. As a result, with no drop in the offered land in restricted
areas compared to unrestricted areas, there were no differential changes in
bids. Such a response is also consistent with prices of completed units
remaining unchanged in the face of less buyer demand."
"If developers expect the
restrictions to be loosened at some point in the not so distant future and
their holding costs are low, then they would have little incentive to reduce
prices rather than wait until demand recovers once restrictions are lifted,"
Prof. Yang explains. "Alternatively, the response is consistent with loss
aversion. Whatever the explanation for the behaviour, this research reflects
other studies on macro-prudential policies finding that although policies to
restrict demand when housing markets are hot have strong dampening effects on
market volumes, their ability to reverse problems of high house prices and
address affordability are limited in the short to medium run."
Tsur Somervillea, Long Wang and Yang
Yang, "Using purchase restrictions to cool housing markets: A
within-market analysis," Journal of
Urban Economics, Volume 115 (January 2020). Available at: https://doi.org/10.1016/j.jue.2019.103189
This article was first published in the China
Business Knowledge (CBK) website by CUHK Business School: https://bit.ly/2HiF5UQ.
About CUHK Business School
Business School comprises two schools -- Accountancy and Hotel and Tourism Management -- and
four departments -- Decision Sciences and Managerial Economics, Finance, Management and Marketing.
Established in Hong Kong in 1963, it is the first business school to offer BBA,
MBA and Executive MBA programmes in the region. Today, the School offers 8 undergraduate programmes and
graduate programmes including MBA, EMBA, Master, MSc, MPhil
the Financial Times Global
2020, CUHK MBA
is ranked 50th. In FT's
ranking, CUHK EMBA is
ranked 24th in the world. CUHK Business School has the largest
number of business alumni (36,000+)
among universities/business schools in Hong Kong -- many of whom are key
business leaders. The School currently has about 4,400 undergraduate and
postgraduate students and Professor Lin Zhou is the Dean of
CUHK Business School.
information is available at http://www.bschool.cuhk.edu.hk
or by connecting with CUHK Business School