China has accelerated its efforts to boost housing demand with several major cities relaxing or fully scrapping restrictions on residential property purchases since the latest Politburo meeting. 

We've argued that measures aimed at re-introducing a true market in high-end housing as part of China's dual housing reform will be key for revival. 

In November, we discussed Beijing’s plan for a Singapore-style, dual housing market. We argued that this is a savvy approach for Beijing. It allows private housing to function as a store and generator of household wealth for the upper classes, while ensuring ample supply of affordable housing for those of more modest income.

So far, the top leadership's focus has been on the provision of affordable housing, in line with Xi Jinping's goal for "common prosperity". But we viewed allowing well-off urbanites to invest and trade properties again in the "commodity housing" market as the aspect of the reform which could mark an important inflection point.

The wave of easing measures in the past couple of weeks is the strongest signal yet that Beijing is turning away from the dictum that "houses are for living in, not for speculation."

These measures represent genuine progress in China's attempts to restructure its over-supplied housing market by re-introducing a true market for high-end housing while the government steps in to turn lower-valued homes into a state-managed resource.

Removing home purchase restrictions

The top cities in China, long subject to stringent housing buying policies, have now begun to relax them. Hangzhou, the capital of eastern Zhejiang province and the hottest tier 2 city housing market, announced today that it will remove restrictions on residential property purchases and no longer review the qualifications of homebuyers. Xi’an, the capital of Shaanxi province, announced similar steps hours later.

A day before the Politburo meeting at the end of April, the capital of southwestern Sichuan province Chengdu fully removed buying restrictions. And on the day of the meeting, Beijing allowed families to buy one more home in non-central areas. 

In Shenzhen, the city with the highest average housing price per unit, local authorities have loosened personal income tax and social-insurance payment requirements for buyers in some districts while allowing local families with two or more children to buy a second home in some non-core areas. 

These moves in major cities come on the back of relaxation in dozens of smaller ones (see Appendix). 

Policymakers remain concerned that the full relaxation of housing purchase and loan restrictions in first-tier cities -- Beijing, Guangzhou, Shanghai and Shenzhen -- will cause the re-inflation of house price bubbles. But for the ‘dual housing market’ to work, prices must move freely in the commodity, or market, half of the scheme. And in order for prices to move freely, speculation must be tolerated. 

According to banking sources who recently attended housing policy coordination meetings, the removal of all house purchase restrictions in all major cities is under consideration.  

"Housing trade-in" 

During its latest meeting, the Politburo -- China’s top decision-making body -- vowed to “assimilate the existing housing stockpile”, the first time it has used such wording in about eight years. The pledge is a strong signal that the government understands the need to move beyond the anti-speculation mantra that has governed housing market policy in recent years.

The latest “housing trade-in” policies are indicative of the measures it will employ to do this, while simultaneously boosting the provision of affordable housing.

Local governments are encouraging homeowners to swap their old homes for new apartments by offering attractive new home mortgage rates and tax breaks. “Housing trade-in” policies vary from city to city, from direct purchasing by state-backed entities to offering discounts to homebuyers. About 50 cities have introduced the “ housing trade-in” programme, Chinese media have reported.

Local governments will act as the backstop in the process. For example, in Shanghai, the most active housing market in China, residents are guaranteed a full refund on the new property if their old flats are not sold within a certain period. Other cities have offered other types of incentives, including a fast-track approval process, tax breaks, preferential mortgage packages, and new home discounts.

Turning homes purchased by local governments into affordable housing will further entrench the ‘dual housing market’ model. 

The expectation is that local governments will become ‘landlords’ of affordable housing, providing a more sustainable and predictable source of income than in the past, when proceeds from the land sales contributed the lion’s share of local budgets.

 But while the "housing trade-in" schemes are in line with the state planner's proposals to trade-in industrial equipment, as well as household appliances and cars, they will be harder to implement given the lack of a unified housing market.

Conclusion

China has been fighting a contradictory war on two fronts in its approach to its housing market. On the one hand, it has tried to fight bubbles in high-end housing by bemoaning speculation and restricting private developers’ access to capital. On the other, it has tried to incentivise affordable housing.

Importantly, Xi's focus on eliminating all speculation in the housing market has been instrumental in China's consumer sector slump.

This newest plan – to bifurcate the housing market into a high-end private market and a low-end, government controlled reservoir – might just well work.

China's depressed household income and employment expectations will not resolve themselves immediately. But the transition away from houses are not for speculation is a real positive step towards unleashing consumer savings and reviving the moribund economy.