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POLICY: Legal Updates on the Real Estate Markets
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altPrior to 2010, the real estate market in China had experienced incredible, red-hot growth. Wary of worsening inflation and with few other investments options, Chinese had been pouring their money into housing over the last decade. The Chinese government, concerned by the steep run-up in prices and residents' frustration with the hefty cost of housing, started to take actions in 2010 to rein in speculation. Market correction programs with various tightening policies have been gathering pace ever since. 
This essay reviews the government's efforts to cool down the residential housing market over the past two years and discusses the outlook for the future.

Restrictive Measures on the Buyers 

The government has, since April 2010, implemented a series of measures to cool down the overheated residential property market and curb speculation. Some of the key measures are designed to restrict purchases. 
According to the Circular on Firmly Restraining Housing Prices from Too Rapid Rising in Certain Cities  ("Circular 10  2010") issued by the State Council on 17 April, 2010, a differentiated housing credit system was adopted under which the down payment by any family, including the borrower, spouse, and under-aged children, who purchases a residential property that has a floor space of more than 90 square metres with a loan, shall be no less than 30% of the total price; while the down payment by any family who purchases a second residential property shall be no less than 50% of the total property price. In the meantime, mortgage rates that apply for a second residential property shall be 1.1 times that of the first property, i.e. the base rate of the bank. 
On 29 September, 2010 the People's Bank of China and the China Banking Regulatory Commission issued the Circular on Issues Concerning Improving Differentiated Housing Loan Policies ("Circular by PBC") which further tightened mortgage policies across the board for all banks by requiring that down payments for the first residential property shall be more than 30% of the purchase price, regardless of the size of the property. In particular, the Circular by PBC forbids any bank loans to be granted to any non-local buyers who fail to produce local tax returns for more than one year or payment of local social security dues for more than one year. Circular by PBC expressly provides that no mortgage loans shall be made available for any purchase of a third residential property.
The State Council again on 26 January, 2011 issued the Circular on Issues Regarding the Further Regulation and Control of the Real Estate Market ("Circular No.1 2011") which further restricts buying qualifications by requiring that the down payment by any family who purchases a second residential property financed by bank loan shall be no less than 60% of the total property price, which is a 10% increase from that of the requirement under Circular 10 2010. Circular 1 2011 further provides that any local family who has proof of local tax returns for more than one year or payment of local social security dues for more than one year, and who already owns one property can only purchase one more property. Moreover, any local family who already owns two properties, or any non-local family who owns one property and cannot supply proof of local tax returns for more than one year or payment of local social security dues for more than one year, are prohibited from purchasing additional properties. 

altRestrictive Measures on Real Estate Developers

On 7 January, 2010, the State Council published the "Circular on Promoting Stable and Healthy Development of the Real Estate Market", which indicates the government's determination to crack down on price gouging, land and property hoarding, spreading misleading market information, and disrupting market order. 
Moreover, The PRC Ministry of Land and Resources (the "MLR") has recently released the revised Rules on the Disposal of Idle Land which will come into force on 1 July 2012 (the "2012 Amendments"). Under the 2012 Amendments, "idle land" is defined as a plot of state-owned land designated for development purposes, the land user of which has failed to commence the construction project within 1 year after the commencement date of construction as set out in the compensable land use contract, or the date of allotment decision, or within 1 year after the date of land delivery if the commencement date is not specified by such documents or cannot be ascertained) There are two circumstances under which land plots will be deemed idle, being the circumstances where construction has been suspended for 1 year with less than 1/3 of the proposed area constructed, or less than 1/4 of the proposed total capital invested. In the event that a land plot is found to be idle due to reasons other than "reasons attributable to government" or force majeure, the developers may face an "idle surcharge" of "20% of the land grant premium or land allocation cost" if the land has remained idle for more than a year but less than 2 years. Further, the government has the right to recover the land without compensation if the land has remained idle for more than 2 years. 

Residential Real Estate Tax Pilot Scheme

In January 2011, the municipalities of Shanghai and Chongqing rolled out pilot schemes for imposing real estate taxes on residential properties owned by individuals. Although currently limited to Shanghai and Chongqing, it is expected that the programme will be expanded to other cities which will have their own discretion to draft local rules.

altMeasures Restricting Foreign Investors

On 4 November, 2010, the Ministry of Housing and Urban-Rural Development issued Circular 186, which underscored the rules first introduced by Opinions Governing the Market Access and Administration of Foreign Investment in Chinese Real Estate Market, issued in July 2006 which includes (i) each foreign individual may only purchase one residential property for self-use, and (ii) each foreign branch office or representative office may only purchase non-residential property in the city where it is registered for its own office use. 
It is noteworthy that the newly amended Catalogue for the Guidance of Foreign Investment in Industry issued by Ministry of Commerce and coming into force in early 2012 prohibits foreign investment in the construction and operation of villas. 

Outlook for the Real Estate Market Regulation

Despite all these stringent measures aimed at deflating the bubbles in the real estate market, home prices in China have not exactly taken a nosedive. However, they have steadily declined in small increments over the last two years. There are good reasons to believe that the market is simply correcting itself following excessive speculation, and the real estate market will not crash as witnessed in 2007 in the US. The current round of correction in the property sector is driven by government policy rather than due to developers' deteriorating balance sheets, widespread default by home owners, or lack of interested buyers. Thus, it won't lead to systemic risk and a massive panic induced sell-off. 
Looking ahead to the rest of 2012 and 2013, the future for the real-estate market will be largely determined by policy changes, macroeconomic factors, monetary policy, and exchange-rate policy. 
Although, there is no indication as to when China will eventually ease property restrictions, there is an aura of hope that the market will soon turnaround, particularly if property restrictions are eased further in light of the recent reduction of reserve interest rate. 

WINNERS has been recognised consecutively as "Tianjin Firm of the Year" by two international legal journals: Asia Legal Business from 2008-2012, and by China Law & Practice from 2009-2011.
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