On the face of it, a regulator that insists on restricting supply in an attempt to cap prices risks ridicule at the very least. In a socialist market economy they may just get away with it but such measures are unlikely to achieve much beyond a modest slowdown in market activity for a few months.
Evidently last year’s policies have not had the desired effect as residential prices have risen quickly across the country – up 15% in Beijing and 35% in Shenzhen in the first quarter this year. The new policies introduced by the government aim to put a firm cap on China’s "errant" housing markets where rapid price rises are not part of the political agenda.
The main policies are:
Minimum down payments for new apartments of more than 90 square meters will rise from 20% to 30% of the total price. This policy has little effect on the overall property market but it may help the statistics conform – those who were planning to buy now have to wait until they’ve saved up enough to cover the deposit. Supply and demand dynamics will only be altered in the short-term and another growth spurt can be expected in six months or so.
Transaction tax will be extended to five years instead of the two years imposed 12 months ago. The policy created a rush of transactions on the second hand market to beat the tax – a case of d?j? vu for those who were studying the Shanghai property market last year. This time it was the Beijing Property Exchange Center’s turn to work overtime.
Post-June 1, some owners who failed to complete before "the deadline" simply raised the price of their properties to cover the tax. As a result, this cooling measure is in fact inflationary, in the short term at least. No doubt a wait-and-see period will unfold over the next few months. Surveys already suggest that 32% of buyers are putting off their purchase plans in Beijing with most intending to rent in the short term.
Apartments below 90 square meters should account for more than 70% of total supply. This is one policy where a far more appropriate measure would be a positive incentive rather than an administrative control measure. Perhaps something for first-time buyers or similar would have achieved the same result.
The key question here is what the market actually wants. Buyers upgrading to a larger property tend to want more space than 90 sqm and, if that is not available, this policy can only adjust the future supply structure but cannot cool prices. In fact it is more likely to push prices up by restricting supply – all projects that have yet to secure a construction license will be postponed so properties can be redesigned to satisfy the new policy.
It is hard to predict when houses prices will rise, but rise they will. From the end of 2004 to the beginning of 2005, Shanghai house prices rose rapidly, but those in Beijing did not. During the first quarter of 2006, Beijing house prices rose rapidly, but Shanghai’s did not. Two Chinese cities, two international cities – the growth cycles are not the same.
Overall, the view is that we have yet to see sufficient use of both "push and pull" policies. Positive measures to encourage politically acceptable property development alongside negative policies to discourage unacceptable development would stand a greater chance of success. What we can expect is further fine-tuning as a new set of policies becomes an annual event.