China needs more incentives to boost home ownership

Beijing policies designed to aid the selling down of real estate industry inventories will only provide a short-term boost to market sentiment, property consultants say, arguing that more incentives are needed to lift buying and leasing demand.

They suggested the mainland authorities should be more proactive in stimulating home sales, particularly in third-tier cities suffering from severe over construction.

“The announced measures will only have psychological impact on the market,” said Thomas Lam, head of valuation and consultancy at Knight Frank. “Buying and leasing demand will be unlikely to increase without the help of more incentives such as lower initial down payments or bigger discounts for mortgage rates.”

Boosting property demand is among measures to revive the mainland’s ailing economy decided upon at a key three-day meeting that concluded on Monday. The plan includes helping rural residents buy properties in towns and cities, encouraging real estate developers to cut prices, revoking restrictions on home purchases and encouraging individuals and companies to buy vacant flats and lease them out.

Lam said cash-hungry developers had already begun cutting prices in a bid to shore up their financial positions.

He said he most home sales in the past nine months had been for units selling for 8,000 to 10,000 yuan per square metre.

“It shows genuine home buyers instead of investors are the major buying force,” he said. “With the help of lower down payments and preferential mortgage rates, it will definitely simulate buying interest among first-time buyers.”

At present, buyers have to put down 30 per cent of a flat’s value as the initial down payment.

To encourage leasing demand, he said the government could come up with tax incentives to attract individuals and companies to buy flats either for their investment or as staff accommodation.

The inventory level in 35 mainland cities returned to a normal level of 12.5 months based on sales volumes during the past six months, compared with almost 20 months as of July last year, according to securities house Jefferies.

First-tier cities such as Shanghai and Beijing would need only 10 months to clear their inventories and second-tier cities returned to a reasonable level of 12.2 months. But unsold inventory in third-tier cities remained high at 18.9 months.

Joe Zhou, head of research for JLL China, said the plan would help the market absorb some excess inventory in lower-tier cities, where demand was lacklustre.

“However, the impact on higher-tier cities, such as Shanghai and Shenzhen, will be minimal as these cities are actually short of supply,” he said.

Different cities were facing different problems, Zhou said.

“Lower-tier cities may need additional loosening measures for a sustained recovery,” he said. “However, the higher-tier cities actually may need tightening measures to cool down sales in order to tame price growth.”