The cooling conundrum
The mainland's new leaders face the dilemma of how to bring down home prices without endangering the property-reliant economy
The mainland's new leaders are inheriting a challenge that stymied the outgoing government: deflating a bubble in big-city home prices without dampening economic growth.
In one of its final acts before the leadership change, the State Council on March 1 imposed tough new measures intended to cool the market, a step that sent property stocks tumbling. While curbs initiated last year had some success, prices resumed climbing in the second half as the central bank cut interest rates to reverse an economic slowdown.
Real estate and related industries such as construction account for about a fifth of the mainland's gross domestic product, while cities, especially smaller ones, rely on land sales to raise revenue. The mainland's leaders are searching for ways to address the mounting frustration of ordinary Chinese struggling to afford a home while minimising wider economic damage.
"Beijing recognises that there are bubble conditions in many major urban real estate markets and wants to be seen as responsive to public concerns about rising home prices," Nicholas Consonery, Asia analyst at New York-based consultancy Eurasia Group, wrote in a note on March 6. "But the new leadership is well aware of the dangers of freezing the nationwide market and causing a bigger slowdown in growth."
Home prices rose for a ninth month in February, extending a rebound in the second half of 2012 after interest rates eased. Premier Wen Jiabao, who is being succeeded by Li Keqiang, vowed to keep housing affordable during his 10-year term. Still, home prices climbed 1.5 times from 2003 to 2012 to the highest since the mainland privatised home ownership in 1998. The new leadership - being ushered in by the legislature in a once-in-a-decade transition at the National People's Congress in Beijing, which ends tomorrow - will maintain the real estate tightening measures Wen initiated, said Zhu Haibin, chief China economist at JP Morgan Chase in Hong Kong.
"Wen's property polices in the past 10 years couldn't be counted as successful," said Zhu. "The property-tightening measures will continue under the new administration, but before Wen goes, he certainly wants to give them a push."
The government has taken multiple steps since it first began to tackle surging property values in April 2010. It raised down-payment and mortgage requirements; imposed its first property tax, in Shanghai and Chongqing; and enacted restrictions in about 40 cities, including limiting the number of homes people can own and requiring new residents of a city to wait a year or more before buying a home.
In the latest measures, the council ordered even higher down-payment requirements and interest rates for second mortgages in cities where price gains have been "excessively fast". The council said it will study the cities that have piloted the property tax and accelerate and widen the trials, and has told local authorities that they must release price-control targets in the first quarter. It also warned real estate companies found hoarding land or collaborating to push up home prices that they will be barred from accessing new development loans or raising funds in capital markets.
In addition, it is cracking down on individuals avoiding a 20 per cent tax on profits from sales when the original purchase price is available, a levy many only pay a fraction of by feigning they cannot provide the data - a common practice in cities where prices have escalated the most.
The Shanghai Stock Exchange Property Index, which tracks the shares of 24 mainland developers, has fallen more than 10 per cent since the March 1 measures, extending its decline this year to 12 per cent. The benchmark Shanghai Composite Index is little changed this year, compared with the 4.5 per cent gain by the MSCI AC Asia Pacific Index. The recent measures do not tackle the real issues in the property market, said Yao Wei, China economist at Societe Generale in Hong Kong. Yao is ranked by Bloomberg as the most accurate forecaster for quarterly gross domestic product.
"Property measures have been restated over and over again," Yao said. The latest statement "is stronger than expected as the government sent a signal that they are still serious about the tightening. But it is only targeting the superficial problem of home prices. It still hasn't taken out the speculative demand and the fiscal reliance of local governments on land sales," she said.
Yao estimates China's economy will expand about 7.8 per cent this year, as tightening in the property market is likely to prompt banks to pull back on mortgage lending. China set an economic growth target of 7.5 per cent for this year, unchanged from last year.
The world's second-largest economy posted 7.8 per cent growth last year, the weakest expansion in 13 years and down from the average 10.6 per cent rate over the previous 10 years. In a survey, economists forecast a pickup to 8.1 per cent growth this year, based on the median estimate.
The curbs are the firmest since the central government in February last year made the cities of Wuhu and Foshan abandon attempts to lift restrictions imposed by policymakers in Beijing. The mainland's cities, especially smaller ones, got at least 21 per cent of their revenue from selling land last year, according to Zurich-based UBS.