China’s Property Policies Drive Divorce, Underscore Market Excesses – Analysis

By Michael Lelyveld

Once again, eager Chinese home buyers have responded to rising prices by getting divorced.

For at least the second time in recent years, rumors of impending price controls on apartments have sent couples rushing off to break up perfectly good marriages, in some cases so that families can buy properties they may not really need.

Last month, dozens of couples flooded registration offices in Shanghai to file for divorces after reports that the city was considering higher down payment requirements for purchases by married households. Rumors spread that the new rules would take effect on Sept. 1.

In some versions of the rumor, couples were told that divorces would not be recognized for one year under real estate and tax rules unless they registered by the deadline.

The reports of tougher restrictions on property sales followed a 27.3-percent jump in Shanghai’s new home prices in July from a year earlier and increases as high as 40.9 percent in major coastal cities like Shenzhen, according to the National Bureau of Statistics (NBS).

After several days, Shanghai authorities denied they were studying new financing limits, but it was too late to stop the stampede of divorce filings and apartment sales before the end of the month.

One couple told The Wall Street Journal they were trying to avoid a 70-percent down payment requirement for buying a larger apartment by filing singly as divorced first-time buyers and putting down just 30 percent.

“We don’t have any other way out,” the wife said.

While Shanghai held off on new rules at the start of the month, higher down payment requirements for second homes took effect in the central city of Wuhan following similar moves in Nanjing and Suzhou, the official Xinhua news agency said.

Price hikes resume after pause

On Sept. 8, police said they had detained seven Shanghai real estate agents for spreading rumors about new rules to drive up sales and commissions, Xinhua reported.

Two days later, the Ministry of Housing and Rural-Urban Development voiced support for the crackdown and called for penalties to stop similar scams.

The turmoil over home buying comes as the pace of price hikes has resumed after appearing to ease slightly for several months.

A new NBS survey of month-to-month increases in 70 cities released Monday found new home prices were higher in 64 cities in August, up from 51 in July compared with 55 in June and 60 in May, Xinhua said.

In the first eight months of the year, sales of floor space in residential buildings rose 25.6 percent from a year earlier and 40.1 percent by value, the NBS said in an earlier report.

In a survey released by the People’s Bank of China (PBOC) over the weekend, 53.7 percent of respondents rated home prices as “high and hard to accept,” Xinhua reported.

Home loans soared by over 670 billion yuan (U.S. $100 billion) in August as yuan-denominated lending more than doubled from July, the PBOC reported last week.

But recovery in the real estate market has been uneven after a two-year slump drove developers to the brink, leaving many in second and third-tier cities with a huge backlog of unsold homes.

The last time the divorce ploy came into play was in March 2013 as families tried to avoid restrictions on second-home buying and the government threatened to impose a 20-percent profit tax on property sales to cool the market down.

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Three years earlier, former Premier Wen Jiabao pledged to curb speculation and make homes affordable for first-time buyers, but prices in Beijing and Shanghai climbed 40 percent or more in 2010, widening the gap between rich and poor.

After the run up, the price of units in new residential buildings in Beijing reached 20,328 yuan (U.S. $3,081) per square meter in January 2011, Shanghai Securities News reported at the time.

Last month, the average Shanghai sales price hit 41,259 yuan (U.S. $6,204) per square meter, CCTV reported, suggesting that prices in first-tier cities roughly doubled in five years.

The costs and the divorce cases raise the question of how much has changed after the boom-and-bust cycle has run its course.

The answer is not much, except that the central government under President Xi Jinping and Premier Li Keqiang seems less concerned about excesses in the property market, now that economic growth has slowed down.

During the boom years of 2010 and 2011, China’s gross domestic product growth averaged over 10 percent, according to World Bank figures. Now, official GDP growth has dropped to 6.7 percent, making real estate demand a relative bright spot in the fading economy.

After China’s stock markets battered investors with its own boom-and-bust cycle last year, the government has clamped down on speculative trading, leaving the Shanghai Composite Index virtually frozen for the past six months.

China’s industrial sector has plummeted, exports have declined and capital controls continue to curb individual investment abroad.

“That leaves one place where you would put your money, and that would be real estate in the coastal cities,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

“If they’d open up capital flows, people would invest elsewhere and it would take a lot of the pressure off,” Hufbauer said.

Narrow investment opportunities

The narrowing of investment opportunities has become a preoccupation for the rising middle class as those with savings and access to credit continue to seek second and third properties.

The pressures are much the same as they were before the housing boom went bust, even though China’s government has already witnessed the economic and environmental effects of overbuilding, rising debt levels and blocks of unoccupied homes.

If anything, the government may have contributed to the pressures for real estate investment by cracking down on non- bank lending activities that offered higher rates of return.

In August, the China Banking Regulatory Commission (CBRC) issued new rules for peer-to-peer (P2P) loans that bypass traditional banks in the wild and woolly sector that has kept many unsound businesses afloat.

P2P lending products “can include anything from loans for weddings, guaranteed against the cash gifts that couples expect to receive, to high-yield lending for risky property or mining projects,” Bloomberg News said.

Under the CBRC rules, individuals may borrow a total of up to 1 million yuan (U.S. $150,000) with limits of up to 5 million yuan (U.S. $750,000) for corporations.

But lenders cannot take public deposits or offer wealth management products (WMPs) that promise higher-than-bank rates of return.

The intention is to reduce fraud and default risks, but the result of WMP restrictions may be a further narrowing of investment opportunities.

Meanwhile, central government authorities may be showing less urgency than their predecessors over housing inflation in the big cities because of industrial overcapacity and weaker overall demand.

Building activity that would cut into production overcapacity in sectors such as steel and cement continues to lag.

Property investment in the first eight months rose 5.4 from a year earlier with a slight gain in August, reversing a four-month string of declining growth, according NBS data.

The overcapacity industries that support construction are heavily concentrated in the rust belt northeast provinces, where the first-half economic growth rate slumped to 2.2 percent, far below the national average of 6.7 percent, according to the National Development and Reform Commission (NDRC).

China’s housing problems may also be too diverse to address with a national policy.

While big city markets may be overheated, smaller cities remain cool.

The floor area of new unsold homes fell 5.6 percent in July from a year earlier in 35 major cities, the Financial Times said, citing E-House China R&D Institute, but small cities had a two-year backlog as of late last year.

At midyear, China had 714 million square meters of excess housing inventory, the NBS estimated, according to Xinhua. By the end of August, unsold floor space of all commercial buildings stood at 708.7 million square meters after six months of modest declines, the NBS said.

“The government will need different policies for different cities,” the news agency said, quoting an NDRC official.

So far, the cities are still waiting for word from the central government, leading to a patchwork of policies, rumors of new restrictions and, in some cases, responses like the Shanghai divorce rush.

“The affordability of housing is bad in the key cities of the eastern coast and it’s probably going to get worse,” Hufbauer said.