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REAL ESTATE: Government May Continue to Tighten Real Estate Market Regulations
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Following the Circular of the General Office of the State Council on Continuing to Fulfill Regulation and Control of the Real Estate Market (“The Circular”) issued by the State Council, a number of provinces and cities including Beijing, Shanghai, Guangzhou and Chongqing have recently released detailed implementation rules in response to The Circular. Mr Frank Chen, Executive Director, CBRE Research, China, commented accordingly: "The majority of local rules introduced have the following common traits: a lack of originality for the new strategy, a lack of clarity in rules, and a “lower-than-market” expectation in the severity of rules. “ 
On 1 March, 2013, the State Council issued The Circular to reaffirm the local government’s responsibility toward stabilising home prices, increasing the number of ordinary housing (small- to medium-sized housing) and social housing supply, while strengthening market supervision. In addition to those cited, the new policies have sent out signals to further curb the real estate market by means of purchase restriction, differentiated lending policy, and tax levy. Detailed measures include: extending the purchase restriction scope, increasing requirements for second home mortgages and enforcing a 20-percent capital gains tax on property sales. 
Home price control target for 2013
The price control target for those cities with detailed policies announced has been set to be “no more than the actual growth rate of urban disposable income per capita this year,” with the exception of Beijing and Shanghai which have explicitly set the target to be “relatively stable.” We noticed that, when compared with previous price control targets from previous rounds of intervention, a greater number of local governments have adopted the “actual growth rate” rather than “GDP growth rate”. 
No expansion on purchase restriction scope 
The scope of detailed purchase restrictions for most cities was not extended to include more people or expanded to all administrative regions of the city as stated in The Circular, with the exception of Beijing, which has extended its purchase restriction to single Beijing residents. 

Further refinement on 20-percent capital gains tax policy needed 
Amongst the new measures in the Circular, enforcing a 20-percent capital gains tax on property sales has attracted the most attention among market participants. However, in the detailed implementation rules released by the respective local government, the majority of the local governments failed to specify when and how the tax will be implemented, with the exception of Beijing, Shanghai, Guangzhou, Shenzhen, Chongqing, and Tianjin. For the argument that a tax levy may harm reasonable upgrading demand, only Beijing and Shanghai have confirmed that the tax may be exempted if it is the primary residence of the seller who has owned the property for five years or more. Therefore, we believe that the 20-percent capital gains tax measure still needs further refinement in several aspects, such as the scope of exemption and the definition and calculation of capital gains. On the other hand, vagueness in current policy amongst most cities does leave room for further intervention against future market movements. 
Policy for widening of differentiated lending policy not yet in place
The stated ‘Strictly implementing differentiated lending policy’ in the Circular is interpreted by the market as increasing mortgage interest rates and down payments for second homes. However, to date, only Beijing has proposed to increase the down payment for second homes according to price control targets and policy requirements, whilst a select few cities expressed their intention to increase mortgage interest rates and down payments when appropriate. For the majority of the cities, widening of the differentiated lending policy is not mentioned at all in their detailed regulations. We believe that while further widening of the differentiated lending policy still needs more guidance by the central bank, specific implementation can be left for local banks to decide on its line of credit and the local housing market transaction price and condition. 
Long-term mechanism still a long way to go
There is a lack of substantial description in regards to any long-term intervention mechanism such as property tax amongst local detailed regulations. As previously announced, the Scheme of the institutional reform of the State Council and function transformation is proposed to set up a national housing registration system before the end of June 2014. We believe that a national shared housing registration system and information platform is the prerequisite for a nationwide property tax implementation. 
In general, among detailed regulations released by local governments, with the exception of Beijing, the other cities are lacking severity, clarity and enforceability. This also means that local governments are still withholding room for decision-making and flexibility in this round of property curbs while the central government has no intention to depress all property markets with the use of a “one-size-fits-all” measure. However, since introduction of the “5 New Measures” in the middle of February, the central government and local governments have sent out important signals through various detailed measures: 
1. Gradual easing policies beginning in Q2 2012 have been scrapped and the property market in the coming period will be heavily regulated; 
2. If the 20-percent capital gains tax is implemented effectively, this will change the perception that “property can only appreciate.” Therefore, it will steer housing away as an investment vehicle and returning it to its original function as a residence - in line with the central government’s objective. 
3. Beijing has released the strictest measures due to the surge in home prices since 2012, gaining the most public attention. Beijing’s measures can also be used as a framework for policy upgrading among other cities in the event of prices further increasing.
4. A timetable has been proposed for the establishment of a national integrated housing registration system. This is an important step towards the creations of a long-term mechanism for market regulation given the current short-term administrative intervention. 
Considering that the majority of cities still have great flexibility in implementation, actual impact from the new policy in the short-term is difficult to accurately evaluate at this moment. However, we believe that the tightening signal sent out during this round of interventions, such as the pending policy on 20-percent capital gains tax, as well as measures to further tighten second home mortgages, will have efficacy amid the ongoing expectations for home price appreciation since Q2 2012. Home price growth is expected to gradually slow down and transacted volume is expected to fall as well. Rising transaction costs may change buyers’ perspectives, and force them to switch into a wait-and-see strategy in the near future. Taking into account the slowdown in the land market during 2011 and H1 2012, new housing supply in the short-term is expected to remain limited while the risk for price decline due to oversupply is very small. Meanwhile, if housing prices in some cities still maintain a fast rising trend in the near future, further tightening policies introduced by local governments should be expected.

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