Where others fear to tread, China may succeed in cooling its property market

Faced with runaway housing prices, most governments are reluctant to intervene, for fear in part of endangering the post-pandemic recovery
By contrast, Beijing has upped the ante in its clampdown. The housing market remains central to its drive to reduce inequalities

Nicholas Spiro

Published: 9:45am, 7 Sep 2021

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House prices are rising across the world at a rapid pace, putting pressure on governments and central banks to take action to counter threats to financial stability and address concerns about affordability. The ferocity of the price increases is matched only by the unprecedented geographic breadth of the boom.

According to Knight Frank, average home values across 56 developed and emerging markets rose 7.3 per cent year on year in the first quarter of this year, their fastest rate since the fourth quarter of 2006. Only four countries witnessed declines in prices, while 13 experienced double-digit gains.

A combination of ultra-low interest rates, savings accumulated during lockdowns and the pandemic-induced shift in demand away from densely populated cities towards suburban and more rural locations has turbocharged the rise in prices.

Some countries have taken action. New Zealand’s central bank has restricted access to mortgages and plans to start raising interest rates despite an outbreak of Covid-19 cases. Last month, South Korea became the first major Asian economy to increase borrowing costs to help combat a surge in household debt that has caused home values to soar.

A view of Seoul’s residential and commercial buildings from the observation deck at YTN Seoul Tower, commonly known as the Namsan Tower, on September 3. Last month, South Korea became the first major Asian economy to increase borrowing costs to help combat a surge in household debt. Photo: AFP

However, most governments are reluctant to intervene, partly due to fear that more restrictive policies – particularly the blunt instrument of rate hikes – will endanger the post-pandemic recovery.

Liam Bailey, global head of research at Knight Frank in London, said while central banks expect the surge in house prices – as well as the recent rise in inflation – to be short-lived, they “are nervous and are reviewing their options”.

In mainland China, however, policymakers are grabbing the bull by the horns and are willing to go a lot further to take the heat out of the housing market. Following years of stop-start attempts to tame prices, Beijing has upped the ante significantly over the past several months as part of its campaign to remake the world’s second-largest economy by prioritising “common prosperity”.

The clampdown on the residential property market is much tougher than anything implemented, or contemplated, in other major economies.

Since last year, Beijing has imposed “three red lines” on major developers, capping the size of their debts in proportion to their assets, equity and cash holdings. The curbs have helped push China Evergrande, the world’s most indebted home builder, to the brink of default.

A woman walks past a property advertisement for Emerald Bay by China Evergrande in Hong Kong, on August 25. Evergrande has admitted that billions of yuan of repayment related to property development was overdue and that building work at some of its housing projects had been suspended as a result. Photo: Reuters

Several large cities have suspended land auctions, a huge source of revenue for local governments. State-owned banks have been instructed to reduce their exposure to the property sector, while private equity funds have been banned from raising money to invest in residential developments.

In a sign of Beijing’s determination to stabilise house prices, and end the practice of using the property sector as a tool to stimulate growth, the probability of a long-stalled nationwide property tax being introduced has risen sharply this year.

The campaign to curb social inequalities has thrown the imperative of addressing affordability into sharp relief. House prices in leading mainland Chinese cities are, along with Hong Kong, the highest in the world in terms of price-to-income ratios.

Nomura believes mainland China is facing a “Volcker moment”. This refers to the drastic monetary tightening by the US Federal Reserve in the early 1980s under chairman Paul Volcker, who broke the back of double-digit inflation, but at the expense of lost output and jobs.

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The strategic importance of Beijing’s curbs on the housing market – all previous efforts failed to break the vicious cycle of property speculation and credit growth – and the government’s willingness to sacrifice some short-term growth to reduce the economy’s dependence on real estate indicate China is at an inflection point.

Ting Lu, chief China economist at Nomura in Hong Kong, said financial markets, and possibly China’s own policymakers, are underestimating the severity of the slowdown and disruption caused by the clampdown on the property market. “This time is different,” he said.

Yet, the comparison with Volcker’s inflation-slaying Fed is misguided. Beijing cannot afford to turn the screws on the real estate sector too sharply given its crucial role in the wider economy. Once described as “the most important sector in the universe”, mainland China’s property market accounts for 25 per cent of gross domestic product if revenues from government land sales are included, data from Nomura shows.

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From a market standpoint, the industry comprises the bulk of China’s high-yield, or “junk”, bonds, and is the main conduit for financial contagion. A sharp property-led downturn in China, exacerbated by a wave of defaults, would prove far more damaging to sentiment than the policy-induced growth scare in late 2015 and early 2016 that rocked global markets.

More importantly, the last thing Beijing wants is a full-blown financial crisis in the run-up to the Communist Party’s 20th party congress next year that is expected to extend President Xi Jinping’s term.

However, even though a property crash is unlikely, the regulatory noose around the sector may continue to tighten, albeit gradually. House prices in 70 major mainland Chinese cities grew at their weakest pace in six months in July, decelerating for a second straight month, while new home sales have begun to slow sharply.

China has a history of imposing curbs on the property market only to remove them when the economy falters, which happens to be the case right now. Yet, the housing market remains front and centre in the government’s drive to reduce inequalities.

Beijing’s campaign to tame property prices has further to run. In comparison with the cautious approach taken by other countries, it even looks somewhat Volckeresque.

Nicholas Spiro is a partner at Lauressa Advisory