In Asia, Property Boom—Not Bust—Is the Worry
When it comes to real estate, Asia has a very different set of problems from the West.
China, Singapore and Hong Kong have all introduced a slew of measures to combat housing markets that threaten to get out of control. And there are more than a few voices who say they have already.
Will the intervention work?
Home sales have slowed, particularly in China, as buyers react to the new rules. But demand remains strong, suggesting prices will begin to climb again eventually.
In Hong Kong, where supply of new homes is very tight, prices are testing their highs hit during the bubble of 1997, and moving well above them at the luxury end of the market.
Luxury-property prices rose 19.8 percent in Hong Kong last year, according to Jones Lang LaSalle, and 13.6 percent in Singapore. Buyers are getting more cautious about further tightening, and both cities have introduced hefty stamp duties, or taxes, to prevent short-term trading. But any downward pressure is limited. The brokerage expects prices in both cities to stabilize, and push ahead later in the year driven by rising rents and low holding costs.
It’s on the mainland where the new rules are likely to have the greatest impact, market watchers say. The mainland’s centralized, communist government has shown it is ready to micro-manage the issue at a level that Hong Kong and Singapore, famous for their free markets, won’t.
“It is very much a tweaking of the market on a day-by-day basis,” says James Macdonald, head of China research at the brokerage Savills. “It takes some time for these regulations to take effect, and it is quite hard for the government to hit it on the nail. They may overshoot a little bit—but then they will loosen on their regulations.”
The biggest change came at the end of January, when the cities of Shanghai and Chongqing put in place China’s first property taxes on high-end and investment homes. Shanghai imposed a levy of 0.6 percent on second homes and purchases by non-residents, a rate that falls to 0.4 percent for lower-priced properties. Chongqing’s tax is on high-end homes, with a rates of 1.2 percent, 1 percent or 0.5 percent depending on the transaction value of the home.
The implementation of the Shanghai and Chongqing taxes came a day after the State Council unveiled the latest in a long line of measures aimed at restraining the property market. It raised the minimum down payment for second homes to 60 percent of the purchase price, up from 50 percent. It also ordered 36 cities to impose limits on how many homes families can own.
Similar property taxes are likely to be rolled out in other overheated cities such as Beijing, Shenzhen and Hangzhou
Still, the new property taxes are so low it’s unlikely to dissuade buyers on its own. They will, however, have an important impact in other ways: The two main impacts should be to broaden the tax base for local governments, which have previously relied heavily on land sales for funding, and to introduce the idea of holding costs for property investors. Many Chinese property investors currently don't take on tenants, making them easier to sell.
“When there’s a carrying cost, they’re more likely to rent it out, so there are some good benefits out of the property tax, potentially,” says Michael Cole, the director of research for East China at Colliers International.
Cole believes the concept of a property tax will also make Chinese buyers more discerning. At the moment, there’s a philosophy that when it comes to property, anything goes.
“There’s not too much discrimination as to what’s a quality house built in a good location as opposed to a not very good quality house in a not good location,” he says. “When the boom settles down a bit, some people will find they got a good deal and some will not.”
The regulations will likely cause a temporary drop in the number of home sales in China on top of a steep decline in 2010. New-home sales fell 20 percent in the tier 2 cities of Tianjin, Shenyang, Chengdu, Wuhan, Xiamen and Changsha, according to figures from DTZ, and double that rate—42 percent in the tier 1 cities of Shanghai, Beijing, Guangzhou and Shenzhen.
Prices, however, have moved in almost exactly the opposite direction. New-home prices shot up 35.4 percent last year in tier 1 cities, to 18,853 yuan, $2,869, per square meter, according to DTZ. Tier 2 cities saw their costs for new homes climb 26.1 percent to 7,015 yuan, $1,067, per square meter.
Many forecasters expect more modest price gains this year—5 percent to 10 percent and sales have already dipped.
At this point, its difficult to tell exactly what impact the new regulations have had on sales because February is generally one of the slowest months for the property market, as the Lunar New Year holidays disrupt people’s purchase plans. But brokers say the anecdotal evidence is that business is way down.
“In 2011, we will see the impact of two years of government policy finally having an effect on the residential market,” says Michael Klibaner, the head of research at Jones Lang LaSalle. “Demand suppression policies have been taken to their logical extreme, with investors now essentially being barred from making additional purchases. The results of two years of policies to increase the supply of housing will also finally begin to have a real impact on the market this year.”
More than a dozen cities—including Beijing, Shanghai and Guangzhou—have already capped how many homes families can buy. The capital city has also made it hard for outsiders to purchase property; Beijing has started requiring non-residents to show they’ve paid taxes for five years before they can buy a home. Nonetheless, there’s plenty of chatter in China about how to get around caps on how many homes families can own.
Will the intervention work?
Those sorts of rules “don’t look at dis-incentivizing people from buying properties, they look at forbidding them from buying property,” says Macdonald at Servills. “They are less sustainable. They’re not rebalancing the equation.”
One of the key problems is that Chinese investors still have few options other than putting their money into property.
The domestic stock market lost 14 percent in 2010, one of the worst performances among global exchanges, and it is incredibly volatile.
Moreover, even though interest rates are rising, inflation is rising faster, discouraging the use of bank savings accounts.
Creating other attractive asset classes would require major changes not just to property-ownership laws but to China’s investment landscape.
“Chinese people do have money and they want to invest that money and gain a return on that money,” says Macdonald said. “If they do have other options that will ease the pressure on property prices moving upwards.”