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China's property rules rife with reversals, twists and turns

The Communist government uses a vast array of policy levers to try to pop housing bubbles before they inflate

Shanghai 

IN February, officials in Xi'an, the home of China's famed terracotta warriors, loosened the requirements to gain a residency permit, a pre-requisite to buy property in the city.

Then, when data showed last month that local house prices had surged a nation-leading 2 per cent in May, officials suddenly reversed course, ruling that non-local residents needed to have at least five years of tax records or social-insurance contributions to be allowed to buy property.

The rapid U-turn and oddly precise rules highlight the vast array of policy levers Chinese authorities have at their disposal as they seek to pop housing bubbles before they inflate, while keeping the economically crucial property industry chugging along.

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While countries such as Australia, Singapore or the US confront surging house prices with restrictions on foreign buyers, tightened loan-to-value limits or higher interest rates, China's all-powerful Communist government has free range to fine-tune the housing market as it sees fit.

"I have never seen any other country have restrictions that are so detailed and meticulous," said Chen Gong, the chief researcher at Beijing-based Anbound Consulting, which bills itself as the biggest independent strategic think tank in China.

"In most nations, a market problem is fixed by the market. In China, all crucial issues are decided by the government, especially the property market."

Given the government's wide range of policy options, it's hardly surprising when its efforts are successful, like keeping home prices in the biggest cities largely flat since 2016. Yet, even with such control, China has also had some failures as it over- or under-reacted to the market.

A down-payment cut for second-home purchases in 2014 was unexpectedly followed by six central bank interest rate reductions within the next 12 months, fuelling a 50 per cent surge in home prices over the following two years.

Another common method used to control prices is banning anyone not born in a particular city from purchasing property there. Or banning anyone who's single or even just getting a divorce.

Other restrictions centre around how many apartments a person can buy: the rule is usually two if a couple are local residents, and one if neither is local.

There are also rules around when buyers can sell. In Suzhou Industrial Park - a county-level administrative area located in Suzhou, a city west of Shanghai known for its canals, bridges and classical gardens - you cannot flip a home within five years.

Some restrictions are more subtle, from developers being told they're pricing new projects too expensively to banks being told they're offering mortgages too cheap.

There have also been limits on the maximum prices developers can pay for land plots, as well as curbs to their fundraising ability.

It all comes down to the "fundamental difference between a free-market economy and a controlled economy", said Henry Chin, the head of research for Asia-Pacific and EMEA (Europe, the Middle East and Africa) at CBRE Group. "In China, the government can kill demand directly if it has to."

The aim is to avoid a repeat of Japan's experience - letting the property bubble flare up so much that it eventually bursts.

That is paramount, considering real estate directly accounts for about 6 per cent of China's gross domestic product and likely adds as much as 20 per cent given its wider influence.

Real estate in any economy also has a multiplier effect, feeding into consumer sentiment and spending as people buy white goods to stock a new kitchen to booking a holiday if home prices are buoyant and they feel rich.

There is also the social aspect. Shrinking wealth, even on paper, could provoke mass unrest in a country of 1.4 billion people.

In China, when a person builds enough wealth, "the only safe bet is to put it in property", Mr Chin said. "You cannot possibly shake this overnight." BLOOMBERG