China’s housing market has been under heavy downward pressure since the second half of this year. According to incomplete statistics, up to now, 21 Chinese cities have issued housing market “Decline Limit Orders” or DLO’s in an attempt to keep housing prices from cratering. Real estate development enterprises are not permitted to sell a home at a lower price than prescribed for any reason.
On Nov. 1, the Housing and Urban-Rural Construction Bureau of Yongzhou city, Hunan Province issued a “Notice on the Prohibition of Low Price Dumping”, requiring real estate developers not to privately sell houses at too low of a price or at below cost, or to utilize a disguised price reduction for any reason that may “disrupt the normal order of real estate…”, or else penalties will be imposed.
The Housing and Urban-Rural Development Bureau of Yueyang city, Hunan Province, issued a notice concerning new commodity housing, restricting closing prices. It’s required that the actual closing price of any home sale shall not be higher than the record price, nor lower than 85 percent of the record price, otherwise the commodity housing online contract filing system would show an alert and prevent buyers and sellers from signing the contract for the sale.
Of the 21 cities in the country that have issued DLO’s some are directly issuing administrative orders, while others are restricting price cuts by interviewing real estate companies. Sellers attempting to offload a property outside of the pricing criteria will be caught by the alert system and the sale would not be able to go through.
These cities include Shenyang, Yueyang, Kunming, Tangshan, Jiangyin, Ezhou, Zhangjiakou, Zhuzhou, and Yongzhou among others. Except for cities such as Shenyang and Kunming, most of the cities are third, fourth, and fifth-tier cities.
Dr. Frank Tian Xie, Professor of Marketing and John M. Olin Palmetto Chair Professor in Business at the University of South Carolina Aiken pointed out, “The Chinese Communist Party has issued the ‘Decline Limit Orders’ to prevent the real estate market from collapsing if it continues to fall. The real situation in China’s real estate market is that supply is greater than demand, and there is a surplus of housing stock.”
“A large number of real estate companies are facing a financial crisis. In order to pay back bank loans, they are eager to sell off the slow-selling properties held at their hands. Housing prices are bound to drop significantly as a result.”
“This is likely to lead to the bursting of the real estate bubble and the collapse of the property market. This is the last [thing] the Chinese Communist Party wants to see because a large number of assets of the Chinese Communist Party elites are in the real estate market.” Xie added.
Xie also pointed out that the dilemma for the Chinese Communist Party is that if the price of housing is prevented from falling, housing companies will not be able to sell their homes and will go bankrupt due to their inability to pay back loans and debts, which will lead to bad bank loans and an even worse credit crisis.
Executive director of Kingston Securities, Dickie Wong, told Reuters, “In terms of Chinese developers that are already highly indebted, already hit the three red lines, they cannot fulfill the repayment – not only some of the financial products in mainland but also U.S. dollars denominated offshore high yield bonds, this is already the new normal.”