Shenzhen is Adjusting the Minimum Down Payment Ratio for Second Homes to 40% starting from Tomorrow, Which Information is Worth Paying Attention to?

The Need for Restraint

I’m fed up with writing.

I can only once again use my golden analogy:

When the cup of yogurt is sucked empty, you remember there’s still the yogurt lid to lick.

After all the sucking, there’s still a tiny bit of yogurt left inside. I don’t know why it can’t be sucked a bit fatter, or why a new can’t be sucked.

The policy still hopes to preserve fiscal revenue because it’s obvious that it’s aimed at the first-hand property market. The hope is to further stimulate the demand for replacement/improvement. Mild inversion still exists, as does the product discrepancy. As long as the game of the first-hand property market can continue without being emptied, real estate developers will continue to acquire land, and everyone will still be able to preserve fiscal revenue.

This time, the adjustment of the standards for ordinary residential housing has been enlarged to a usable area of up to 120 square meters, which translates to a total area of 160 square meters. Apart from very large duplexes and villas, which have suddenly become ordinary properties, almost everything has been fully opened up. At the same time, the reduction in down payment for the second home is intended to encourage the middle class to further leverage or to reserve “real estate” for their underage children in the future.

It is possible that the selling pressure of the second-hand property market may increase further, but it will not cause significant waves in the actual market because the help it can provide to activate the replacement chain is limited. On the contrary, the increase in the number of second-hand properties being listed may cause the prices in the actual transaction process to fall, thus offsetting the so-called “luxury home tax” that you are targeting.

The current situation is actually very delicate. There may already be a minority of people who continue to increase leverage, and even the previous yogurt lid example is not appropriate. Doing so may just be licking the lid and scraping the cup wall.

In the current debt spiral liquidity trap, the pessimistic expectations of the household sector for future cash flows will not change, and a general shift is impossible.

On the one hand, there are the landlords who have been gorging on yogurt, leading to obesity, hypertension, hyperlipidemia, and a host of other complications over the past decade or so. On the other hand, there are the empty yogurt cups that have become deflated. Before everyone tries everything to suck them dry, it might be better to starve yourself for a few days, first to expand the yogurt cup, pour in some milk, give it the right temperature and the right time, and then let the yogurt ferment inside the cup. At that time, it won’t be too late to suck it up. The landlords have drunk quite a bit before, relying on their bulging bellies. If they starve themselves for a few days, it won’t be that bad.

But history has shown that humans never restrain their desires when faced with easily obtainable positive feedback objects. I’m patting my belly to guarantee this.

Adjustments to Shenzhen’s real estate policies: lower down payment and cancel luxury property tax.

Analysis of the policies: aimed at boosting housing demand and easing the chain of property exchange.

Expectations: limited impact on housing prices, no significant improvement in purchasing power.

Possible consequences: potential distress for those holding mortgage loans, potential increase in property supply pressure.

Implications: The situation in Shenzhen could have a ripple effect on other cities, prompting caution for property investments.

Advice: Consider selling non-primary homes in lower-tier cities and be cautious in second-tier cities. The logic behind this adjustment is clear, let me explain it.

There are two major adjustments to the real estate policy in Shenzhen today.

1. The down payment ratio for the second property has been adjusted from 70% for ordinary housing and 80% for non-ordinary housing to a uniform 40%. This ratio is already the lowest among first-tier cities, on par with Guangzhou.

2. The threshold for the previously implemented “luxury mansion tax” of 7.5 million total price has been abolished, with only area-related restrictions remaining.

These two adjustments can be said to be the most significant relaxation of real estate policy in Shenzhen in the past year or two. They are much larger in scale compared to the previous requirement of verifying housing affordability before granting loans.

Why is that?

Currently, the real estate market is not doing well, prices have been declining, and the transaction volume is low, which is already a well-established fact. There are many reasons for this, such as a weak economy and excessively high housing prices, which are undoubtedly the fundamental factors.

However, there is another reason behind this, which is that the chain of property exchange has been disrupted.

There is a significant demand for upgrading living conditions, with people hoping to move to bigger houses, buy new houses, or purchase properties in good school districts. However, many of these individuals do not have much money, so the condition for upgrading is to sell their existing property. Unfortunately, the houses themselves are not easy to sell, causing the chain of property exchange to become stuck.

The two policy adjustments announced today aim to relieve and reduce the burden for those with upgrading demands.

1. By lowering the down payment, it means that people with upgrading needs can now buy a new property without necessarily having to sell their old one. Those who already have a 40% down payment can proceed with the purchase and are not in a rush to sell their old property. This portion of purchasing power has been released.

Moreover, as this group of buyers enters the market, the sellers who sell their houses to them will receive money. These sellers can then proceed with their own purchasing behaviors (although not everyone who sells a property will necessarily buy another one). This preliminary chain has been reconnected.

2. The cancellation of the luxury mansion tax directly reduces the transaction costs for houses that have a slightly higher unit price but are not particularly large (below 144 square meters) and have good locations or other favorable conditions. This policy complements the first adjustment.

The analysis of the policies is complete, but please pay attention to the emphasis on “however”.

However, this can almost be regarded as the last card that the Shenzhen government can play (if you expect a complete lifting of the purchase restrictions and sales restrictions, I think it is impossible), which means that if property prices do not rebound after these measures, those who have been insisting might have their spirits shattered. Will property prices rebound? I can say it clearly, it is impossible.

Why? Because expectations have already changed, and this expectation is nationwide. Shenzhen can no longer foresee a possibility of rising house prices, even if some funds want to speculate, they would be deterred by looking at Shanghai, Guangzhou, and Hangzhou. It is impossible to achieve that in the current larger environment.

Furthermore, the basic purchasing power has not fully recovered, and it is far from satisfactory. Civil servants are receiving salary reductions, exports are not growing, and many industries are not doing well. These factors have not improved the situation regarding basic income.

Alright, if after these two measures are implemented, there is still no movement in property prices, those who hold operating loans will have to face the repayment period between 2023 and 2025. Currently, when new properties are launched, they generally only sell 20-30%, and there will be considerable pressure to sell the remaining inventory. Originally, the plan was to hold back a bit, but if these two policies do not lead to any change, it is feared that they will be unable to hold back any longer. And once things get out of hand, you can imagine the consequences.

There is one more point, and it is not only a matter for Shenzhen.

As a pioneer in property speculation, if Shenzhen falls, other cities will fall even faster.

As I have been saying this year, for non-self-occupied properties in third, fourth, and fifth-tier cities, if you can sell, then sell without hesitation. For second-tier cities, if there is no strong certainty, try to sell as well. As for first-tier cities, decide based on your own situation. Now it can be said that the window of opportunity is almost closed, without significant setbacks, there is no hope of selling properties in third, fourth, and fifth-tier cities. Even first and second-tier cities are shaking, so you should count your blessings.

The Effect of the Adjustment on the Second Home Market in Shenzhen.

This adjustment has lowered the threshold for residents to purchase a second home, which is beneficial for better meeting the demand for both rigid and improved housing.

The leverage for second home buyers has been loosened, essentially promoting the willingness of second home improvement buyers to move.

But it is still difficult to say what the effect will be.

After a brief small peak at the beginning of the year, Shenzhen house prices have been falling continuously, even after a significant decline last year, which is truly frustrating. Many properties in Nanshan are already well below the guidance price, with prices only equivalent to half of the peak in 2020.

In the new housing market, there are already properties being sold at a 30% discount from the recorded price. Thinking back to the booming property market in 2020, where properties were sold at recorded prices, it was a chance for many to make a fortune.

The decline in Shenzhen’s real estate market has already surpassed that of Beijing and Shanghai, and the main reason is the increase in supply.

In the previous few years, the supply in Shenzhen was 30,000 to 40,000 units, but now the annual supply of just commercial housing has exceeded 70,000 units. Combined with last year’s inventory, the number of newly listed properties in Shenzhen this year exceeds 100,000 units. And this is only the number for commercial housing, if we add talent housing, the number will be even higher.

Shenzhen is the only major city in the country where the supply of new properties has significantly increased, and this significant increase was clearly stated in the second round of housing reform introduced at the end of 2018.

Starting from last year, the annual supply of commercial housing alone will be around 70,000 units, continuously supplied for five years, and the same number will be added for talent housing and property with shared ownership.

The real estate market is a policy-driven market, so it is important to understand Shenzhen’s real estate policies. If you bought a property in Qianhai for 180,000 RMB per unit in 2020 and you see that the price of new houses two years later is only 90,000 RMB, and the supply has doubled, would you still rush to buy a property?

In addition, the trade war and technology war have a greater impact on Shenzhen, which has an export-oriented and mostly private enterprise-based economy compared to Beijing and Shanghai.

In recent years, the income of professionals in the public sector, such as teachers and doctors, and engineers in large private companies has plummeted, and with the increase in housing supply, on one hand, purchasing power has decreased, and on the other hand, supply has greatly increased. It is not difficult to imagine where house prices will go.

Although there have been continuous positive policies in the real estate market, prices are still falling, and one major reason is that there is not too much substantial support behind these positive policies.

The problems faced by companies like Evergrande and Country Garden are the results of their crazy expansion. If even a top-performing company like Vanke struggles and faces elimination, then it is worth reflecting on whether there is a problem with the questions being asked.

Now, there is a need for money in infrastructure construction, attracting investment, subsidizing high-tech industries, transfer payments, paying government employees, and operating public transportation. Where will this money come from?

The city government has valuable land, and this value can only be realized through land sales and citizens buying houses. If you want citizens to buy houses and they end up losing money, who would still buy?

With the second round of housing reform, the construction of affordable housing needs to be significantly increased, and this construction will be subsidized by selling commercial housing. If you want commercial housing to be in high demand, everyone needs to make money by buying houses. If people continue to lose money by spending millions or tens of millions on a commercial property, who will still buy?

Affordable housing guarantees living conditions, but if people who buy low-priced affordable housing can still make money, who would still buy commercial housing? If commercial housing doesn’t sell, how can we subsidize affordable housing?

Therefore, in order to implement the second round of housing reform, two things must be achieved:

First, commercial property owners must make money, and second, people who live in affordable housing must have a good living experience, but they must not make money.

The total amount of M2 money supply was 198 trillion yuan at the end of 2019, and by the end of this year, it will surpass 300 trillion yuan. Since last year, it has been growing at a rate of more than 12%. This much money cannot just lie in the banks. If the financial war between China and the U.S. temporarily stops, this money must come out and flow into the hands of companies and individuals. Will this circulation drive up the prices of consumer goods or asset prices?

A major change is coming soon!

Too Late

It’s too late.

There’s only outgoing breath, no incoming breath. Only then did I make up my mind to use a ventilator?

Where were you earlier?

The Choice of Asset Optimization

The price of houses has fallen below the guidance price for second-hand houses, and the guidance price has finally been canceled. The general decline in leverages is improving, and people no longer need to prove their creditworthiness when purchasing a house. The sales of new houses are not moving, so finally the down payment ratio has been reduced.

Nowadays, real estate in first-tier cities has too many financial attributes, and financial instruments are highly sensitive to policy changes. However, financial risks cannot be ignored. Therefore, with the high leverage in the basic market, the treatment of the decline in the balance sheet is close to a choice that determines the future. Companies like Evergrande and Sunac have also made their choices in the past, and the results were predetermined.

For ordinary people, it is also a choice between being settled now or profiting the most while navigating within the confines of economic laws. Different people have different choices, especially those who own multiple properties. Now they must optimize their assets.

Too late to take stronger medicine now

This dull knife is useless for cutting meat. It would have been better to take stronger measures earlier; now it’s too late.

Shenzhen Housing Policy: Boost for Market Recovery

Due to its metropolitan status, first-tier cities always appear hesitant in regulation measures compared to others. However, they are actually doing their utmost to loosen the real estate market.

In just one night, Shenzhen issued two policies: canceling the 7.5 million luxury housing threshold, which effectively reduces the tax burden on single units by 5.3%, saving hundreds of thousands in taxes, and reducing the down payment for the second property from 70-80% to 40%, directly halving the down payment. Some people say, “But that’s still higher than the 20% down payment for the first property” - the assessed value leaves room for manipulation.

If these policies were implemented before 2021, the Shenzhen property market would have likely taken off immediately. But now, no matter what strong measures are taken, their effectiveness seems to be delayed.

However, at the current stage, the introduction of this policy will at least be more powerful than the previous “Recognize the House but Not the Loan” policy.

Although “Recognize the House but Not the Loan” has a certain stimulating effect on the market, it’s a bit like an aphrodisiac—providing a strong short-term stimulation, but lacking sustainability.

The key premise of “Recognize the House but Not the Loan” is to sell the previous property, but as can be seen from the current activity in the real estate market, it is difficult to sell.

This is the biggest flaw of “Recognize the House but Not the Loan.”

Now, with the introduction of this policy, it directly fixes this flaw.

There is no need to consider the premise of selling a property. This is the most direct reason for the introduction of this policy.

Even as an affluent first-tier city, Shenzhen couldn’t bear it. Once, people from all over the country came to speculate on real estate, driving up prices so high. But now, even if the prices are reduced, nobody buys. Factories have moved away, and they won’t return. It went from 10,000 to 100,000, and now it has fallen to 50,000. Those who bought at 10,000 have made a big profit, but those who bought above 50,000 suffer.

In 2017, Shimao Group acquired land in Shenzhen for 23.9 billion, built the Shenzhen-Hong Kong International Center, and the land along with the building was valued at 16.3 billion in 2023. However, it failed to sell for 13 billion in July this year, and it failed again for 10.4 billion this month. The estimated price for the next time is likely to drop to just over 8 billion…

The anchor for pricing houses has shifted from the rich to the ordinary people, or one could say from luxury goods to consumables. This process will take a long time and ultimately be anchored in the price-to-rent ratio or rental return rate.

According to Shenzhen statistics from last year, there are over 3 million commercial housing units, 6 million small property rights and rural houses, and over 1 million affordable houses. Altogether, they can accommodate nearly 10 million households based on an average of three persons per household, which is enough for Shenzhen’s population of 30 million. In addition, there are over 7 million registered residents in Shenzhen. A large number of migrant populations may not necessarily buy houses in Shenzhen.

The once booming Shenzhen property market was once filled with legends of “sky-high tea fees.” Now, it has declined to such an extent. Did anyone ever think that selling houses would become so difficult?

There were factors such as speculation in Shenzhen’s previous property prices, but the finance, internet, and foreign trade industries—the three major high-paying industries in Shenzhen—also played a role.

Once the economy worsens, the number of new high-paying positions will inevitably decrease.

It’s ironic—we want the real estate market to rise, but we also fear it going crazy. Villages in various regions are also quite helpless.

Difficulties

I have been thinking that we might soon enter a phase where down payments for housing will be reduced. Rather than using the general description of a low housing demand, a more intuitive situation is that the economy is sluggish, unemployment is high, and residents do not have money. Not only do they lack money now, but their future income expectations are also not good. It is difficult to manage expectations in such a situation. In the current difficult circumstances, how can we make a large enough group believe that their future income situation will gradually improve and therefore choose to buy a house and take on debt?

The definition of demand is that it must be a desire to purchase and the ability to purchase. It seems difficult to stimulate the desire to buy, so why not reduce the down payment and increase the ability to pay? This way, the resistance seems smaller and it is easier to achieve results.

Wuhan, Xi’an, and Wuxi announced the “cancellation of purchase restrictions” on the same day. In September, 12 cities completely lifted purchase restrictions. What signal does this release?

However, if we continue to stimulate leverage in the household sector without any improvement in the future economy, it is no different from drinking poison to quench thirst.

If down payments are reduced nationwide, it is estimated that it can delay the situation for a long time. But is the time gained from this enough compared to the time needed for the macro economy to reach an ideal state? This may be a question.

Although lacking rigorous data calculations, subjectively, I believe that if the down payment for first homes nationwide is reduced to 20%, it would be close to the limit that residents' leverage can bear, given our economic structure.

Difficult to manage.

Not cheating poor people.

Shenzhen is truly Shenzhen, advocating fairness towards the poor. What does “格局” mean? (Tactical reverse rotation)

Shenzhen’s Housing Market Begins to Relax, Beijing and Shanghai to Follow

Shenzhen is also starting to struggle, showing signs of relaxation. The real estate market in first-tier cities seems a bit shaky.

Guangzhou has been implementing various relaxations, while Shenzhen, Beijing, and Shanghai have been more cautious in their relaxations.

The recent relaxation in Shenzhen clearly demonstrates this.

The ranking of the resilience of housing prices should be: Beijing = Shanghai > Shenzhen > Guangzhou.

When Beijing and Shanghai also start to continuously relax, it indicates that the housing bubble is starting to accelerate its squeeze.

Shenzhen announces the adjustment of the minimum down payment ratio for second homes starting from tomorrow.

The minimum down payment ratio for personal housing loans for second homes, which was previously 70% for ordinary homes and 80% for non-ordinary homes, will be uniformly adjusted to 40%.

This effectively lowers the threshold for residents to purchase a second home.

For those who already own a home and have unfinished mortgage repayments, the down payment ratio for buying a second home will be reduced from the previous 70-80% to 40% in one fell swoop.

Let’s take an 8 million RMB residential property as an example.

After the new policy, the down payment pressure for second homes will be directly reduced by 3.2 million RMB.

In the short term, this should encourage some people to buy houses, but the long-term impact is not significant.

To truly drive sales, concessions need to be made in the first-time homebuyer market, as stimulating the second-hand housing market will have less impact.

Moreover, there have been some changes in the criteria for defining ordinary homes, including the removal of the 7.5 million RMB limitation.

Previously, there were three criteria for defining ordinary residential properties:

1. Residential properties with a building plot ratio of 1.0 or higher.
2. Individual housing units with a built-in area of less than 120 square meters, or individual housing units with a total area of less than 144 square meters.
3. Actual transaction price of less than or equal to 7.5 million RMB.

All three criteria had to be met simultaneously.

Now, one criterion has been removed.

After the new policy, for example, with a total price of 7.5 million RMB, an interior area below 120 square meters, and a property held for more than 5 years without being the only property owned by the buyer and seller, tax savings of 330,900 RMB can be achieved. This concession has some impact, providing a bit of leverage to boost sales.

There is a genuine intention to stimulate sales.

According to institutional data, in October this year, Shenzhen added 405,000 square meters of presale first-hand residential properties.

The inventory still remains at a high level of nearly 5 million square meters, with an average time to clear of 18.5 months.

This indicates that the real estate market in Shenzhen is not clearing well, and there is significant sales pressure.

Regarding second-hand properties, as of October 30th, there were a total of 58,179 valid second-hand properties for sale in Shenzhen, which is also at a relatively high level.

In October this year, the transaction prices for second-hand properties in Shenzhen fell by 2% compared to the previous month.

Moreover, more than 70% of the second-hand properties sold in October were below the official reference price.

Homeowners are eager to sell, as they are not very optimistic about the future of the real estate market.

Therefore, the real estate market is gradually adjusting in this way, and the resolution of the bubble will be very slow, possibly taking more than ten years.

However, sales cannot suddenly rebound significantly until prices return to a reasonable level.

Only when there is more support for first-time homebuyers and prices match the income of the majority, will sales have the opportunity to truly pick up. Other stimuli are just minor factors in increasing sales.

They cannot change the overall trend.