Why Chinese property is still hotter than stocks

Beijing’s latest move on Sunday to charge higher mortgage rates for first time home buyers may not be enough to curb the country’s huge appetite for real estate investments, an analyst told CNBC on Monday.

“Even with the increase in mortgage (rates), those rising costs are not even keeping pace with the rise in inflation in China, which means the real interest rate that households are looking at — the ultimate real cost of capital — is actually coming down,” said Michael Kurtz, head of regional strategy at Macquarie Securities

“Leaving your money in a bank in China is a losing proposition in real terms, so there is strong incentive in China to put your money into physical property as a savings vehicle rather than as a residency,” he said.

While the stock market has been equally good as an inflation-hedge savings vehicle, Kurtz highlighted that equities have not been as stable, the reason why Chinese investors would prefer to put their money into property than into a very volatile domestic equities market.

Over the weekend, Beijing ordered banks to lower the discount mortgage rate for first time home buyers to 15 percent from a previous 30 percent, the Beijing News reported, ending a policy introduced in late 2008 to bolster economic growth.

“The net effect to a first time home buyer is well over a percentage point in terms of the increased cost to buy a home right now,” said Paul Keung, managing director and head of China Research, Oppenheimer & Co. on CNBC.

“What China is trying to do is keep prices affordable as they are somewhat rising too quickly,” Keung said.

However, Richard Barkham, group research director at Grosvenor, highlighted that at least 50 percent of residential home purchases in China are done entirely on cash.

“(The government’s measures) are probably having an effect of slowing the market,” Barkham said.

But he acknowledged that there’s still “terrifically strong domestic demand dynamics” and relatively loose monetary policy, despite the cooling measures.

“There is a wall of positives on China real estate. It’s quite hard to control those with administrative measures all the time,” Barkham said.

Source : CNBC – 1 Nov 2010