Beijing will try to control property prices without stifling growth

The incoming fifth-generation party and national leadership in Beijing undoubtedly wishes to start its term on a positive note. But in approaching the task of jump-starting China's economy and pulling it out of its present rut, it will have considerably less room to manoeuvre than did the outgoing leaders.

Their solution in 2008 was to apply a massive fiscal stimulus to shield the economy from the global financial crisis.

Though China has sufficient financial reserves to roll out another, even more robust stimulus, it could do so only at the risk of sparking another real-estate boom-and-bust cycle - which could be even more destructive than the downside of the current cycle and which the government wishes to avoid at all costs.

So within this fairly constrained space, the incoming leadership must immediately wrestle with the conundrum of how to keep the lid on residential prices while still harnessing housing demand to drive growth.

Though it will want to keep the public-housing-construction campaign pumped up - a subject that is highly sensitive in China given the recent rapid growth in the gap between the haves and have-nots - revenue from land sales needed in many cities to support such housing will likely remain below normal levels.

Faced with this potential funding shortfall over the coming year, the new central government is likely to increase support for policies intended to attract more private investment to public housing, an area where it has enjoyed relatively little success. It is unlikely to publicly change its line about the necessity of imposing home-purchase restrictions.

However, if the Chinese economy remains subdued over the coming year, Beijing will be less likely to interfere in local authorities' fine-tuning of the restrictions.

At the same time it will not countenance any major rise in housing prices sparked by another round of speculative investment. This was borne out by the November move to raise interest rates on purchases of first homes in 14 cities in eastern, southern, and central China, which was a shot across the bows of those intent on staging a price rebound in these markets.

It seems likely, then, that the kind of dynamic, ongoing tussle between the central government and municipal authorities - over the tightening or loosening of restrictions on housing purchases, and on the cost and availability of credit - witnessed since last year will continue into next year and probably well beyond.

It is true that municipal governments may be constrained when confronted with the Ministry of Housing and Urban-Rural Development's prohibition on relaxing local home-purchase restrictions. But among the 48 cities in which the restrictions were imposed this year, about 20 have fallen back on one of the few tools left to their own discretion - adjusting the borrowing policy on their municipal-housing provident funds.

Reportedly, in the last few months most of these 20 cities have moved to raise the limit on how much can be borrowed, and some have also moved to lower the minimum housing down payment.

Regardless of the conflicting signals coming from the recent raising of mortgage interest rates for first-time homebuyers in these cities, and local governments' granting increasing access to housing-provident funds as a source of credit during the past year, demand for ordinary housing is still set to become more buoyant in 2013.

This is because it is typically middle-class urban residents who borrow from housing provident funds to buy homes in which to live.

However, these moves are unlikely to rekindle the speculative enthusiasm of the previous period, because the total credit released as a result of the relaxation - while not insignificant - will be insufficient to become a force driving individual deals in the higher-end market segment.

The central government will also extend the implementation of the national real-estate tax to more cities, while still holding back from precipitously attempting to impose this new tax regime at the national level. Beijing believes more time is required to iron out internal contradictions and make technical preparations for its nationwide rollout.

Next year, land sales to developers and residential sales to the public are both expected to rise off the generally depressed levels witnessed in 2012, triggered by a more optimistic mood on the part of the homebuying public following the emergence of a somewhat more relaxed credit environment.

Land sales in some cities are expected to return to somewhat more positive levels in 2013, especially in a number of first- and second-tier cities such as Beijing, Shanghai, Nanjing , and Suzhou. A combination of rising demand and declining construction has seen the residential supply drop to comparatively low levels in those cities.

Also, in a geographically diverse group of second- and third-tier cities, developers have recently stepped up acquisition of sites for either residential or composite development at attractive prices. This trend is expected to continue into next year because a combination of factors will again make certain cities and specific market segments viable for property development.

However, it should also be borne in mind that the presence of those developers that have accumulated substantial inventories of unsold stock will remain a negative force in the market. Many developers in this group have assumed substantial leveraging in order to bear the cost of carrying these inventories forward. And those whose portfolios are concentrated in cities with weaker fundamentals will remain under pressure to continue discounting sales prices.

More specifically, those localities where developers have an exceptionally large supply of unsold properties in the pipeline, or where there was excessive speculation during the pre-2011 residential-property boom, are expected to continue to experience broad declines in residential prices next year.

Therefore, the collective weight of these financially burdened developers and their unsold stock, combined with the drag exerted by the continuing implementation of market-cooling policies, is expected to prevent a strong rebound in overall residential sales in 2013.

While these dark clouds on the horizon are not expected to immediately dissipate, many of the better-financed developers have taken some encouragement from the recent steps towards easing the credit environment. They will enter 2013 with an appetite to replenish their diminished land banks and take advantage of still-viable localities where land prices have dropped well below their 2010 peak prices.

These stronger players will be seeking situations where they can find opportunities for distress plays, or find viable locations or project types that are not subject to purchase restrictions.

When selecting sites in larger cities where housing purchases remain restricted, the big developers will show a greater preference for politically correct but commercially viable land parcels zoned for subdivisions of ordinary housing.

Andrew Ness is lead ULI Research Consultant, Urban Land Institute, Asia Pacific