An article in the WSJ outlined a government plan for banks in Beijing to curb the risk of speculative real estate investments. Basically the government outlines a list of transactions where lenders should place limits:. In Beijing Acts to Limit Speculative Investing, a few major points are outlined:

1.       Refuse mortgages to those that own two or more homes

2.       At the very least, the purchase of a second or third home should require a 40% down payment

3.       First time homebuyers should have a minimum of 30% down

4.       Refuse mortgages to non residents who owe taxes for more than a year

The thought behind much of this is to remove risk from speculation as the market increases, while also insisting that homeowners curb their owner appetites for buying real estate. When prices begin to rise, speculators can inflate market prices just as they had before. The Chinese governments wants the market to improve organically and at a normal and healthy pace. They fele that forcing lenders to set limits on financing will force speculators to put more cash into the deal or simply pay all cash. If investors are required to put more “skin in the game” they will certainly think twice- or perhaps not at all- about making the purchase. If homeowners need to put down much more to buy a first or second home, they might need to wait a bit, and that is okay too.

I think these are great ideas and we should consider doing much of the same. For this I propose the following ideas:

1.       Limit purchasing to two homes per family (primary residence and second home)

2.       Require at least 30% down for second homes

3.       Increase the down payment for investor properties to 40%

4.       Increase the capital gains taxes paid on the sale of investor properties if sold before 5 years

5.       Mandatory education for first time homebuyers

Although strong ideas, perhaps stronger measures need to be taken to curb any repeats of the past. The market may seem flat now, but it could start moving quite quickly. Speculators can once again spiral home prices up too fast for the average homeowner to catch up. First time homebuyers need to be aware of how the process works and what they are getting themselves into before the deal happens.  Education will play a major factor in saving the next generation of first time homebuyers from making the same mistake the last generation made.

Are the banks doing enough now? No. Complete removal of speculation must be done before the real estate market begins to improve. In addition, people need to understand that not everyone is meant to own a home- at least for now- and this is all okay.