China’s property moves cool demand: analysts

China’s moves to rein in soaring real estate prices appear to be cooling demand in the red-hot sector, reducing the risk of the market overheating and derailing the booming economy, analysts say.

In the past two weeks, the government has introduced a range of measures aimed at curbing rampant speculation and spiralling prices, but analysts warn the rules can be skirted easily by buyers looking to make a fast buck.

“The overall effect of these rules is to send a clear signal — the State Council (cabinet) is serious about deflating the housing bubble,” said Stephen Green, head of China research at Standard Chartered Bank.

“By pricking a land and property bubble in several major cities, the State Council has decided to endure some short-term pain for long-term gain.”

Beijing has tightened restrictions on advance sales of new property developments, introduced new curbs on loans for third home purchases and raised minimum downpayments for second homes.

Banking regulators have also ordered lenders to conduct quarterly stress tests on mortgages as the government seeks to clamp down on bad loans.

This week, state media said China was likely to introduce a property tax on residential housing in the first half of the year on a trial basis in Beijing, Shanghai, the southwestern area of Chongqing and the southern city of Shenzhen.

The moves highlight the growing concern in China about the threat of rising bad debts from a U.S.-style property bubble, which authorities fear could derail the rapid-fire growth of the world’s third-largest economy.

“The government is sending out signals that it is not going to keep this party going and that has made people more cautious,” said Patrick Chovanec, an economics professor at Tsinghua University.

Prices in major cities rose 11.7 percent year-on-year last month, the fastest pace since a nationwide survey was widened to 70 cities in July 2005, official data show.

At the Beijing Real Estate Expo earlier this month, the average price of a new apartment in the Chinese capital was 21,164 yuan (US$3,100) per square metre, double that of last year, state media said.

That means a 90-square-metre apartment in Beijing would cost 1.9 million yuan, compared with the average per capita income of 17,175 yuan in 2009.

The cooling measures appear to have spooked speculators and property developers, said Green, citing reports that demand for flats has fallen across the country while developers in Beijing have cut prices by five to 10 percent.

But he warned the rules contained apparent loopholes that could be exploited by speculators.

China lacks a nationwide database on property sales, which means banks have no way of checking if mortgage applicants already own apartments in other cities.

And higher downpayments will have little impact on speculators who mostly pay the full value of properties in cash.

“In other words, if you own five apartments around the country but bought them all for cash, the bank has no way of knowing this,” said Green.

Analysts at Citigroup say they expect prices to start falling as early as May, as the measures dampen speculative demand and new property developments come onto the market later this year.

But they too are cautious, warning that the lack of investment options in China could result in a return to higher prices next year.

“Structural problems such as low to negative real interest rates, lack of channels to protect wealth and savings for households from inflation would again encourage speculation,” they said in a research note.

Chovanec warned the measures aimed at curbing speculative activity could miss their target because about 50 percent of residential purchases were paid for in cash.

“Most of the people paying cash are buying their second, third, fourth or fifth unit to hold idle as a place to stash their cash,” he said.

A holding tax on vacant properties and increased investment options for Chinese people would be more effective in curbing prices, Chovanec said.

Source : China Post – 29 Apr 2010

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