The Chinese government’s latest round of austerity measures intended to rein in the real estate market appears to have hit the mark. There were reports of investors in big cities like Beijing and Shanghai rushing to sell off their properties at a discount, although buyers generally chose to wait on the sidelines.
The buyers’ hesitancy is not surprising: the latest policies are a signal that if house prices continue to soar, the government will respond with more hawkish efforts. What remains to be seen is whether the psychological impact of these measures is merely a temporary phenomenon.
The headline-grabbing news was the State Council’s announcement that it would speed up the creation and implementation of a "property consumption tax" and adjust taxes on "property related income." It also stressed the need to increase housing supply through the construction of public rental and "affordable" homes.
Behind the big words, Beijing continued its incremental action, principally targeting mortgages. Second-home buyers must now make down payments of 50% of the total value of the property, up from 40%, and the mortgage interest rate cannot fall below 110% of the central bank’s benchmark rate. First-home buyers have it slightly easier – the down payment requirement has increased to 30% from 20%, but only for properties larger than 90 square meters.
The State Council also stipulated that banks can suspend housing credit to individuals seeking to buy third homes or above in places where prices are rising too rapidly or where housing supply is insufficient.
Developers are feeling to brunt of the clampdown as well. They have been ordered not to take deposits for sales of uncompleted apartments without proper approval. In addition, information – including price data – on available properties must be disclosed to the public and sales must begin within 10 days of receipt of pre-sale approval.
The measures are the toughest seen so far in this round of policy tightening, but there are two factors which will determine whether they are effective in the long haul.
The first is how committed banks and provincial governments to implementing policies created at national level. So far, many domestic lenders have pledged to obey the new edict though they are still working through the details. If they manage to scrutinize borrowers’ identities and home-purchase records more closely, then the more speculative investors are likely to be deterred.
As for local governments, the State Council has already that they didn’t do an effective job in implementing previous cooling measures. This puts more pressure on them to do it properly this time around. However, it is unclear what, if any, punishment would be imposed on local officials who don’t comply.
Any tightening measures that curb land prices would not be well received in the provinces, which rely on land sales for income. It is therefore necessary for local governments to strike a balance between reaping revenues from land sales and building enough low-cost housing to have a significant impact on people’s welfare. Achieving this balance may take a few years.
The second factor influencing the long-term effectiveness of policy tightening is how big a correction in housing prices the central government would like to see.
Many Chinese developers teetered on the brink of collapse when the market ground to a halt at the end of 2008; a combination of Beijing’s stimulus package and extended credit got them through it. Listed developers leveraged the uptick in the market last year to replenish their capital reserves and settle or restructure debts, so they are unlikely to run into trouble in the short term.
But many firms are seeking to raise yet more money – 40-plus developers including China Vanke (000002.SZ) and Poly Real Estate (600048.SH) are awaiting regulatory approval to tap the markets for more than US$14 billion this year.
One way to cool the market would simply involve cutting off developers’ access to liquidity. But does Beijing really want to do this?
Recent measures have targeted speculators (as opposed to real demand for housing, which is driven by ongoing urbanization) and mortgages (in order to deflate a debt-fueled bubble); implementing an across-the-board clampdown risks crashing the market rather than deflating it.
For this reason, the government has refrained from hiking interest rates while a nationwide property tax – pilot schemes in certain cities, which would be much easier to control, are inevitable – remains nothing more than a discussion point.
The next three to six months will be extremely important in terms of the central government’s future policy orientation. If prices drop modestly with turnover recovering, then the handling of the episode can be judged a success. If prices continue to rise and tougher measures are implemented then China risks a repeat of the overzealous clampdown of late 2007 and early 2008, which had a dampening effect on the whole economy.
It is a difficult balance to strike. The central government has erred on the side of caution and its policies have been well chosen – so far.