Property prices in China rose 3.9% year-on-year in October, the fastest rate in 14 months. The headline-grabbing figure was 0.7% higher than the previous month, and continued an upward trend that has some observers warning of asset bubbles.
It has been over a year since Beijing introduced policies – led by mortgage rate discounts for first-time buyers – to prevent the property market from grinding to a halt. The success of these efforts is evident in price growth, convincing sales volumes, and construction starts rising as inventory is shed.
While most analysts have so far refrained from declaring a bubble, they say China will need to tighten monetary policy next year in order to prevent the property market from collapsing in on itself. T.J. Bond, China economist at Merrill Lynch, believes that tighter macro policies do lie ahead – but not quite yet. “At this stage, we don’t believe that the government wants to see a weaker property market,” he said.
That is especially true as government investment winds down. In its third quarter China report, the World Bank noted that real estate investment will contribute more to growth next year than it did in 2009.
“We expect that the central government fully intends to nurture the end-user consumption that will remain the key economic growth driver for next year,” Macquarie property analyst Eva Lee wrote in a recent report.
Citi property analyst Tony Tsang adds that, while some sector buttressing policies introduced in 2008 are likely to wind down, there is nothing on the horizon so drastic as to send homebuyers scurrying. He believes the most likely steps include withdrawing supportive measures on transaction taxes and levies, re-emphasizing rules on discouraging land hoarding, increasing land supply, and more tightly controlling loans to developers.
“The cancellation of discounts on mortgage interest rates for first-time homebuyers would be saved as a last resort… A significant interest rate hike is less likely as it would fuel pressure on the renminbi,” Tsang said.