Stimulus measures have yet to bear fruit

PUBLISHED : Wednesday, 18 February, 2009, 12:00am
UPDATED : Wednesday, 18 February, 2009, 12:00am

Mainland home prices have continued to decline, albeit at a slower pace, even after central and provincial governments undertook various measures to stimulate the property market.

Latest data from the National Development and Reform Commission shows that average home prices monitored in 70 major mainland cities dropped 0.9 per cent year on year last month, accelerating from a 0.4 per cent slide in December.

The pace of decline slowed month on month to 0.2 per cent in January, from 0.5 per cent in December.

Analysts said it was clear that it would take quite some time before the various stimulus measures could help trigger a full turnaround, and meanwhile many local governments were formulating additional measures to deal with local challenges.

Beijing has so far cut the benchmark lending rate by a total of 216 basis points since September last year, progressively reduced the required reserve ratio for commercial banks, and cut mortgage rates and minimum down-payments for upgraders buying second flats.

Also, deed taxes levied on property or land buyers have been reduced, along with land appreciation tax and stamp duty, while business tax - levied on property sellers - has either been scrapped or reduced.

Local governments, including those in Tianjin, Beijing and Chongqing, are now rolling out further measures to deal with the deteriorating market environment.

The Tianjin city government has lowered its entrance barrier for non-local buyers who previously needed to purchase a flat costing at least 1 million yuan (HK$1.14 million) to be granted a 'blue-stamp residency'. The stamp allows them to enjoy the same benefits as local residents such as nursery, schooling, telecommunication and gas services.

The threshold has now been lowered to between 400,000 yuan and 800,000 yuan, depending on the location.

In Beijing, the city government last month announced 15 stimulus measures, including the scrapping of a restriction on foreigners buying properties in the capital city.

Foreigners were previously prevented from buying properties unless they had been working or studying in the city for more than a year. Also, they were limited to buying one residential unit for personal use only.

In central China, the Chongqing municipal government announced 17 supportive measures, including a proposed tax rebate allowing first-time homebuyers or upgraders to claim their monthly mortgage payments as a deduction on income tax payable to the local government.

For many this will mean a rebate of about 40 per cent of their total income tax payments. However, the policy - successfully implemented in Shanghai during the market downturns in 1998 and 2003 - has yet to be put into effect by the Chongqing government.

Should it proceed with the proposal, Chongqing will set a precedent bound to be followed in other cities, according to analysts, and this would have implications on the central government's policy programme.

Lee Hing-yin, a director of research and advisory for Colliers International's East China division, said if the tax rebate went ahead, it would imply that Beijing was content to allow local governments to have discretion in using customised fiscal measures to support the property market, rather than follow a generic solution introduced by the central government.

'But the local governments have to balance the boosting effect on home purchase against the consequential loss in fiscal revenue which would put pressure on public resources to boost domestic demand,' he said.

If the Chongqing proposal did not see the light of day, this would imply that Beijing wanted to avoid opening the floodgates for other cities to follow suit, Mr Lee added. This would also suggest it was not keen to see a weakening of the fiscal position of local governments - particularly those in poorer provinces or cities - which eventually might seek fiscal support from the central government.

Citi Investment Research analyst Tony Tsang said it was 'difficult to envisage whether and when the tax rebate policy will be implemented in Chongqing as that does involve some complications'.

But he expected further supportive measures from both the central and local governments when necessary, citing the case of the Beijing government last month announcing 15 measures aimed at encouraging housing purchases.

Bocom International analyst Toni Ho Chi-chung believed tax rebates were not a good option.

'The major difficulty is that tax rebates will benefit the middle and upper classes the most, and therefore will further widen the disparity between the rich and the poor, resulting discontent in society,' he noted.

Recent newspaper reports said that Shanghai might introduce a 'blue-chop residency' in areas outside city centre, but Mr Ho said he believed such a measure would have only a limited effect in stimulating the market and did not expect the policy to be rolled out shortly.

Carol Wu, an analyst at DBS Vickers Securities, said comments made recently by several officials also implied price cuts were likely to be favoured. 'Strong policies at the national level were unlikely because the government would want to analyse the effects of recently launched policies before introducing new ones,' she said.

Also, a national policy launch was unlikely before the National People's Congress and Chinese People's Political Consultative Conference meetings to be held next month.

Should the market remain weak, she believed such a national policy initiative might include further relaxation of secondary home mortgage restrictions, removal of restrictions on the purchase of property by foreign individuals or institutions, and the introduction of a personal tax rebate scheme.

These policies should induce investment demand and pave the way for a recovery in the sector, she said.