Tightening threat

Wu Hui has a problem. She has been renting an apartment in Beijing since 2007 and wants to buy, but there just never seems to be a "good" time. Wu, a 30-year-old media consultant, would like to live near the central business district where she works, and considers such a one-off purchase a solid investment. But rising prices and talk of mortgage tightening are making  her decision even more difficult.

"I was considering buying before, when prices were rising, but then the government interfered with the market," Wu said, referring to the cooling measures introduced in late 2007 and early 2008. "Prices have been going up again but everyone says mortgage policies will get tougher. So do I buy now when a mortgage is more affordable or do I wait until prices ease? Does it make a difference?"

Wu is not alone. Urban property prices rose 9.5% in January – the fastest pace in 21 months – and it has left policymakers in a quandary. How can they cool prices yet continue to get homebuyers like Wu Hui off the fence and into the market?

Then and now

The housing market this time last year was nearing its last breath, with prices contracting 0.4%, 0.9%, 1.2% and 1.3% between December 2008 and March 2009, respectively. The standstill soured prospects for the wide range of industries that feed or feed off housing, from steelmakers to household furniture retailers.

Beijing responded with a US$586 billion stimulus package, a "moderately loose" monetary policy and a rolling back of various measures introduced to rein the property market when it was at its 2007 peak. There was a brief lag as the government’s actions took effect, but midway through 2009, homebuyers started putting downpayments on houses again. Individual home mortgages totaled US$205 billion last year, almost 50% higher than in 2008, and accounted for 15% of the US$1.4 trillion in new loans issued.

With more buyers in the market, average prices nationwide grew 24% in 2009 while local markets spiked even higher. Data from property consultancy Knight Frank show that fourth-quarter average new urban home prices in Shanghai and Shenzhen rose 86.9% and 65.7% year-on-year to US$4,581 and US$3,057 per square-meter, respectively.

The combination of rapidly rising property prices and general inflationary pressure has given rise to a market consensus that Beijing will tighten mortgage lending as well as initiate up to three interest rate hikes come the second half of the year. Fears of the government suddenly ripping the cord on property, however, are overplayed: Mortgage tightening is already taking place, albeit subtly.

"While benchmark mortgage rates remain unchanged for now, in reality lending rates are already increasing," said Toni Ho, an analyst with BoCom International, a subsidiary of Bank of Communications.

Several banks, including Bank of China, have rolled back discounts on mortgage rates while other commercial lenders in Beijing, where average prices soared 63% in the fourth quarter, were reported to have raised discount rates on first homes to 85% of the benchmark rate. Bank managers are heeding the government’s call to cool lending.

Figures from property research firm Soufun show that January transaction volumes in Beijing and Shanghai fell 29% and 49% from the previous month, a sign that mortgage tightening is working. On the ground, though, optimism remains strong. "We are still very busy," said Ma Jinjin, a real estate agent at 5i5j in Beijing’s Chaoyang district. "We expect people will still want to buy apartments even if mortgages are harder to get."

This begs the question: How important are mortgages to homebuyers? Not as much as you might think, according to Nomura property analyst Weeliat Lee. About 30% of China’s homebuyers pay in cash with about half of the rest putting down deposits of 40-50% the value of the property. The current minimum downpayment requirement is 20% for first-time buyers and 30% for most others.

Perennial bulls

Lee believes that even if price growth stays strong throughout 2010 and mortgage lending and requirements tighten, homebuyers will not delay their purchase decisions for very long. Given the overriding public belief that property prices will continue their upward trend in the medium-to-long term, there is never actually a "bad" time to buy.

"A hike in benchmark mortgage rates will not have a big impact on the residential property market. What will affect the market is homebuyers’ anticipation of what will happen in the future," echoed Liu Yan, a senior analyst at real estate agency Centaline in Shanghai.

It seems Beijing is happy to play along. The authorities are loath to see a repeat of what happened in 2008 when austerity measures sent the entire property sector – on the buyer and the seller side – from a boil to a freeze. The phrase "you bao you ya," or "maintain and control," is the government’s current catchphrase. It is likely to be repeated many times throughout the year as pressure mounts to support continued but moderate development of an industry that contributes up to 20% of economic growth.

"The central government is controlling the market through a contradictory paradigm," Nomura’s Lee said, referring to government efforts to maintain a vibrant property market while at the same time preventing excessively fast price growth. "A fine balance is needed."

He believes that mortgage tightening and rate hikes have already been factored into homebuyers’ decision making and the market is adjusting – to a degree. The likes of Wu Hui, who are anxious to get a foot on the property ladder, are still poised to jump in. "If I buy this year prices will still go up, so what have I got to lose?" Wu asked. "Property prices almost never go down."

Such sentiments are enough to make some market watchers blanche, particularly those who have witnessed drawn-out periods of stagnation in other countries.

The economic implications are unclear, however. David Ng, China property analyst for Royal Bank of Scotland, noted in a recent report that, while a bubbly housing market does little for the health of the financial system and social welfare, a weak market benefits no one. "The correction in 2008 did not increase supply. Properties were more affordable but unfortunately not more attractive to potential buyers in a declining market," he wrote.

"So, we believe it is in the interest of both the government and homebuyers to maintain a buoyant market."