One more Chinese city introduced reference prices for second-hand homes

One more Chinese city introduced reference price mechanism for second-hand home transactions in the latest move to tame home price growth and curb risks in the housing market.

Housing authority in Dongguan city, South China’s Guangdong province, released reference prices for second-hand homes in 218 residential communities, according to a notice released on Friday.

The reference prices were set based on transaction prices in the second quarter of this year and also took into account evaluation of the local taxation and financial authorities and new home prices in neighbouring areas, according to the notice.

The move came after prices of second-hand homes in Dongguan jumped 47.1 per cent last year, the fastest among Chinese cities, according to data compiled by the state-owned Securities Times.

Prior Friday’s announcement, the local regulators had in August expressed intention to introduce second-hand home reference price. On August 2, eight local regulators released a notice calling for a mechanism for second-hand home reference prices and guide commercial banks to grant mortgage loans reasonably.

Introducing reference prices and asking banks to grant mortgage loans based on the reference prices will affect the the amount of mortgage loans home buyers can get and the amount of downpayment they have to pay.

After the notice in August, listing prices of 3,159 used homes in Dongguan were lowered in the period of August 2 – 31, according to Centaline Property. Average listing price of used homes in the city stood at 22,758 yuan per square meter in September, down 0.71 per cent from a month earlier, according to property portal SouFun.

In the week-long National Day holiday (October 1 – 7), second-hand home transactions measured by floor space tumbled 82 per cent from a year earlier, slumping 97 per cent from the same period in 2019, according to China Real Estate Information Corporation (CRIC). Data from Zhuge Zhaofang showed that only 27 used homes were sold in Dongguan during the holiday, slumping 88.9 per cent from a year earlier.

The market cooling came amid growing concerns as reference prices that had already been published in other cities were as low as 50 – 70 per cent of market prices.

The technology hub of Shenzhen announced reference prices for second-hand home transactions on February 8, becoming the first Chinese city to adopt such a mechanism to tame home price growth. According to data compiled by the Securities Times, Shenzhen’s second-hand home prices surged by more than 34 per cent from the previous year.

In the following three months, average second-hand home prices in Shenzhen fell by a total of 6.49 per cent, according to the Shenzhen Real Estate Intermediary Association.

After Shenzhen’s move, more than 10 cities including Guangzhou, Chengdu and Xi’an have also released reference prices for second-hand homes.

“In the short term, home sellers’ expectation may be much higher than the reference prices and both home owners and potential buyers are holding an wait-and-see attitude, leading to a slump in transaction volumes,” said Huang Tao, executive at Centaline Property in Guangdong province.

In Guangzhou, capital of Guangdong province, second-hand home transactions slumping in September after the local authority published reference prices on August 31. According to data from Guangzhou Association of Real Estate Agents, transaction volumes fell 27.4 per cent in September from the prior month to 6,198 units, sliding 56 per cent from a year earlier.

“The mechanism is mainly aimed to prevent financial risks,” said Huang. As nearly 80 per cent of home buyers make purchases with mortgage loans, if actual transaction prices are higher than reference prices, buyers will have to pay more downpayment, so the mechanism raised threshold for home purchases, he said.

Reference-price mechanism is an inevitable trend as many cities shift the focus of real estate regulations to the second-hand home market, said Li Jiayi, chief analyst at Guangdong Provincial Residential Policy Research Center.

While Li believe the measure may help maintain stability of the housing market and make up the market’ limitation, Guangzhou-based real estate expert Deng Haozhi expressed concerns. “In cities with reference prices, transactions all slumped, to about 30 per cent of normal levels.”

The mechanism not only led to rapid home price drops and will also hurt the stability of the housing market, he said. “It’s unlikely to be implemented nationwide in the long term.”