Pre-sale houses can only be sold if they are capped; sales of existing commercial housing are promoted in an orderly manner——
Commercial housing sales system begins new changes
China's commercial housing sales system has begun a new revolution.
At the end of August, the Ministry of Housing and Urban-Rural Development, the Ministry of Natural Resources, and the State Administration of Financial Supervision jointly issued the "Notice on Improving the Commercial Housing Sales System" (hereinafter referred to as the "Notice") to clearly promote the existing home sales system. During the same period, the People's Bank of China, the State Administration of Financial Supervision, and the China Securities Regulatory Commission successively issued supporting documents covering the three major aspects of sales, credit, and financing.
This is a huge change for China's real estate market.
Changes in the real estate market call for reform of the housing sales system
To understand this change, we have to start with the origin of the pre-sale system for commercial housing.
In the past few decades, China's property market has experienced a period of rapid expansion. In the early days of the commercial housing system, there was a shortage of urban housing and overall demand was high. The market mainly solved the problem of "availability" of housing.
Wu Jing, director of the Real Estate Research Center of Tsinghua University, said that during the period of urban housing shortage, the pre-sale system of commercial housing will help expand the source of development funds and quickly increase the housing supply. "At that time, the core task of the market was to build houses as quickly as possible. Home buyers were mainly concerned about whether they could buy a house and whether the area was sufficient. They could make a house purchase decision based on a few floor plans and renderings. This matched the demand characteristics at the time." Wu Jing said.
From an economic perspective, the pre-sale system for commercial housing had a unique advantage at the time: it could lock in housing availability and housing prices in advance. Wu Jing believes that at a stage when housing supply exceeds demand and house prices are generally rising, buyers signing contracts early often means more choices and lower prices. Some uncertainties in the delivery process are also covered up by these benefits.
However, in recent years, there have been new changes in supply and demand in China’s real estate market—
From the perspective of home buyers, the conflict in the housing field has shifted from "whether it is available" to "whether it is good or not."
"The vast majority of home buyers' demands for 'good houses' are more concrete, personalized, and detail-oriented. It is difficult to fully perceive the needs of lighting, ventilation, sound insulation, and public space on drawings. Only by walking into a completed or even renovated house and examining the details that affect the quality of living life can buyers buy a 'good house' that best meets their needs," Wu Jing said.
From the perspective of market supply, China's housing market is currently structurally oversupplied. If buyers still have to bear the uncertainties such as delivery cycle and delivery quality, buying off-plan properties will not be so attractive.
From the perspective of industry development, the commercial housing sales system also needs reform. In the past, some real estate companies followed the path of "high debt, high leverage, and high turnover" and accumulated hidden risks. To change the "three highs" model, there is an urgent need to reform the commercial housing sales system, strengthen pre-sale fund management, guide real estate development companies to reasonably determine the scale of development and operation based on their own strength, strengthen risk awareness, and promote stable operations and high-quality development of the real estate industry.
"In general, after nearly 30 years of rapid development, the supply and demand relationship in China's real estate market has undergone major changes. At present, the total transaction volume of second-hand houses has fully exceeded that of new houses. The real estate market has entered a period of high-quality development with stock improvement and structural optimization. The commercial housing sales system formed in the past, which focused on pre-sales and rapid turnover, no longer adapts to the new requirements of the new stage of market development, and is in urgent need of reform and improvement." said the relevant person in charge of the Ministry of Housing and Urban-Rural Development.
"What you see is what you get" for existing home sales, and the pre-sale system will be improved simultaneously
How will the housing sales system change? “Promoting current sales” has received the most attention from the market.
According to the "Notice" issued by the Ministry of Housing and Urban-Rural Development and other departments, all localities must vigorously and orderly promote the sales of existing commercial housing, realize "what you see is what you get", reduce commercial housing delivery disputes, fundamentally prevent delivery risks, safeguard the legitimate rights and interests of home buyers, and accelerate the construction of a new model of real estate development.
"An existing house means that the house has been built, and the delivery period is no longer a variable. Buyers know when they can get the house when they sign the contract. The condition of the house is actually in front of them. Buyers can just walk into the house and inspect it item by item." Wu Jing said. This means that the purchase of a house has returned from "judgment of future commitments" to "selection of real goods." This is a huge change in China's commercial housing sales system.
To promote the existing home sales system, the new policy has made arrangements in three aspects.
In the land acquisition process, priority will be given to existing housing projects. The "Notice" clarifies that for commercial housing projects with newly transferred land and commercial housing projects with transferred land that has not obtained a construction project planning permit, priority will be given to existing house sales; for commercial housing projects that have obtained a construction project planning permit, existing house sales are encouraged.
In the financing process, the "host bank system" is implemented. According to the "Notice", real estate projects implement a sponsoring bank system, with two-way selection between the real estate project development company and the sponsoring bank. A project determines a sponsoring bank, and the sponsoring bank alone or takes the lead in forming a syndicate to provide development loans and other financing services.
"Under the new sales system, development loans from commercial banks will become the main financing channel for real estate projects. Through the implementation of the host bank system, commercial banks and development companies will share benefits and risks. Commercial banks can control all capital flows of development companies and reasonably manage and control development loan risks." said Pu Zhan, deputy director of the Policy Research Center of the Ministry of Housing and Urban-Rural Development.
In the home purchase process, loan policies have also been adjusted. The People's Bank of China and the State Administration of Financial Supervision have clarified that the personal housing loan period will be extended from a maximum of 30 years to a maximum of 40 years, giving both borrowers and lenders greater flexibility. The specific period will be determined by the home buyer through negotiation with the commercial bank. The longer loan period means less pressure on monthly payments.
However, the implementation of existing home sales does not mean that the pre-sale system will be abolished across the board. The "Notice" clarifies that the pre-sale management of commercial housing should be improved, including standardizing pre-sale conditions and strengthening the supervision of pre-sale funds.
Specifically, in terms of sales, the main structure of a pre-sold house must be capped before it can be sold; in terms of funds, the down payment, mortgage and other funds of the home buyer must be deposited into the supervision account, and supervision can only be lifted after the project is completed and accepted, and the water, electricity and heating are delivered; the loan for the pre-sale house must be released after the project is completed and filed to ensure that the buyer can "get the house and repay the loan."
"The new pre-sale system raises the pre-sale conditions to the capping of the main structure of commercial housing, shortens the time from purchase payment to house delivery, and can significantly reduce delivery risks." Pu Zhan said. At the same time, the supervision of pre-sale funds has been further strengthened. The housing fund supervision agency will supervise the pre-sale funds to ensure the safety of home purchase funds, prevent funds from being illegally withdrawn, seized and frozen, and better protect the legitimate rights and interests of home buyers.
Encourage real estate companies to invest in quality and promote the healthy development of the market
Promoting the reform of the commercial housing sales system is a practical need to promote high-quality development of the real estate industry. Of course, institutional restructuring may also face certain challenges.
Dong Ximiao, chief economist of China Merchants Union and executive director of Shanghai Finance and Development Laboratory, told this reporter that theoretically, in the short term, because new projects can only be sold from land acquisition to capping, the cycle is lengthened, and the number of new houses available for sale will decrease in stages. However, based on the actual market situation, the current supply of new homes is relatively sufficient.
The sales of existing homes means that the payment collection node will be moved later. Some people are worried that this may slow down the cash flow turnover rate of real estate companies and cause chain negative feedback to the upstream building materials, construction machinery and other industries. Dong Ximiao said that it is necessary to see that the New Deal adheres to the principle of "separating the old from the new": existing projects under construction maintain the original rules to avoid a cliff collapse of supply; at the same time, mortgages on the credit side can be loaned for up to 40 years and the debt service-to-income ratio is relaxed. These measures can be used as hedging tools to retain buffer room on the demand side.
In Pu Zhan’s view, the current period is a critical window period to implement the reform of the commercial housing sales system. "Improving existing home sales and pre-sale conditions have delayed the release of new supply to a certain extent. In the current destocking phase of the real estate market, the implementation of sales system reform can slow down the pace of new supply to a certain extent. At the same time, the new system for commercial housing sales will better protect the legitimate rights and interests of home buyers, reduce delivery risks, help improve home buyers' expectations and confidence, and is good for the demand side. Overall, the new sales system has a positive impact on improving market supply and demand."
From the perspective of the long-term development of the real estate industry, the "three highs" model that some real estate companies have formed is obviously unsustainable. The introduction of a new sales system for commercial housing is expected to promote the healthy development of the industry.
Wu Jing analyzed that promoting the sales of existing homes will promote the formation of a closed loop between quality investment and market returns by real estate companies, thereby giving real estate companies the motivation to continue to increase investment. "This is where the sales of existing homes and the construction of 'good houses' can form a synergy. The commercial housing sales system has shifted from pre-sales to current sales, which is the inherent requirement and inevitable trend of the upgrading of housing consumption and will provide key institutional support for the construction of 'good houses'." Wu Jing said.
"In terms of housing sales, the second-hand housing market will assume the function of a 'reservoir' and undertake part of the demand for home purchases." Dong Ximiao said that in the long run, the opening of the sponsoring bank system and equity refinancing and other tools means that the asset value of high-quality projects will be stripped from the credit quagmire of the parent company and regain market pricing power, which will help the industry to clear out through marketization and promote "good money drives out bad money." The unsustainable "three highs" model will gradually be phased out, while companies with sound finances and strong product capabilities are expected to reduce their asset-liability ratios by directly replenishing capital.
"The quality of real estate companies' assets has improved and their liabilities' costs have dropped, forming a positive spiral that will effectively promote the sound and healthy development of the real estate market," Dong Ximiao said.
Source: People's Daily Overseas Edition Reporter: Liao Ruiling
