Why China’s toughest housing curbs are testing limits of speculative buyers

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LENGTHY residency requirements to purchase homes. Bans on flipping property. Down payments of as high as 70%.

In the tropical Chinese province of Hainan, authorities are going to unprecedented lengths to combat real estate speculators. The campaign, aimed at scuttling one of the nation’s biggest housing booms, may provide a new model for taming buying frenzies that almost always follow in the wake of China’s economic stimulus plans.

Introduced in two rounds straddling President Xi Jinping’s announcement of new measures to boost Hainan’s economy in April, the restrictions are unusual in China not only for their severity but for how quickly they were implemented to avert a bubble. While the curbs have shown early signs of working, some buyers are still exploiting loopholes and others are moving to hot markets elsewhere — underscoring the challenges for China’s leaders as they try to break a nationwide addiction to property speculation.

“It’s like water that’s spilled over,” said Yang Kewei, Shanghai-based research director at property data and consulting firm China Real Estate Information Corp. “You block it here, it flows there.”

March 31 rule: Non-locals can only buy one residence in Hainan, and are required to pay at least 70% upfront. In three popular areas — Haikou, Sanya and Qionghai — non-locals need to demonstrate working experience with five-year records of paying tax or social insurance. For all buyers, selling a home within five years of purchase is banned.

April 22 rule: A non-local buyer now needs to pay at least two years of taxes into the province to be eligible, while the requirement remains at five years for the three big cities. Explicit ban on the practice of gaining buyer eligibility by paying several years of taxes in a lump sum.

Four property brokers, including Cushman & Wakefield, Inc., said Hainan’s restrictions are starting to derail sales as non-local buyers stay away.

But some are finding ways to get around the restrictions. One way is a delayed contract, in which buyers sign for homes that will legally be transferred to them after the two-year waiting period to become a Hainan resident, according to brokers familiar with the practice.

Zhuang Yan, a 37-year-old accountant from northern China, is scouting for suitable property projects outside the three most-popular cities and is willing to give the delayed contract a try. She believes prices are set to surge and said she doesn’t want to “risk” missing the property boom.

Other buyers are replacing traditional sale agreements with long-term rental contracts, getting the right to use the property. At Laiying Peninsula, a hotel project converted into residential use in eastern Hainan’s Wanning city, buyers can sign two separate 20-year rental contracts instead of buying the property outright, said an agent who would only give his last name Yao, to avoid scrutiny speaking about a sensitive topic.

While the crackdown in Hainan follows a now-familiar pattern that has played out in several Chinese cities, officials went further than most to head off a frenzy. Leaders in Hebei province were caught off guard by news last year that China would create an economic zone, sparking an investor craze. The government temporarily froze all property sales within 24 hours of that announcement, but not before buyers clogged highways and camped overnight outside property agent offices to buy homes. — Bloomberg