China Property Prices Defy Beijing's Cooling Measures

Despite moves by the Chinese government to tame its property sector, the market has remained stubbornly resilient, with property prices in the nation's major cities posting their fourth straight month-on-month rise in December and sales picked up pace, the National Bureau of Statistics said over the weekend.

Prospects for residential real estate in particular this year will likely depend on how fast policymakers and central bankers let it move.

Apartments in China
Apartments in China

The central bank has raised interest rates twice since Octoberand last Friday increased the amount of money banks must keep in reserve in a bid to curb lending – following six such moves last year.

It reaffirmed the need for “prudent” monetary policy, with inflation at 4.6 percent as of December, prompting economists to predict more rate raises in 2011.

“A gradual normalization of interest rates is much needed to restrain excessive lending and slowdown deposits flight out of banks’ vaults, both of which help reflate price bubbles,” Wei Yao, China economist at Societe Generale, said in a report on the hikes. She predicts three to four more rate hikes this year.

The interest-rate hikes come on top of a steady trickle of initiatives in 2010 aimed at curbing property price gains. At times the central government simply reiterated existing policies, warning recalcitrant bankers and regional governments to toe the line. But it also took on the property market on two fronts simultaneously, trying both to boost supply as well as curb demand.

“The government has taken a multi-pronged approach, which was different from what they had done in the past,” Michael Klibaner, head of research for China for the brokerage Jones Lang LaSalle, said. “The government will certainly remain on a relatively tight policy footing. On the other hand we are not expecting any new dramatic tightening polices, unless it was in response to the market getting overheated again.”

The brokerage forecasts that residential property prices will gain 5-7 percent this year, one-quarter the pace of 2010. It believes there’s a general lack of supply in the housing market, which suggests good long-term prospects for developers, but expects the government measures to restrain prices this year.

Much of what the central government is trying to do is to make sure its policies are followed at a local level. Premier Wen Jiabao said just after the second rate rise that measures to curb the property market hadn’t been enforced sufficiently. He repeated his desire to see “reasonable” home prices before his term ends in 2012.

“We introduced about 15 measures this year, but it appears that they were not well-implemented,” Wen said in a radio address at the end of December. “I believe that after some time, the home market will return to a reasonable level with our efforts.”

"The government will certainly remain on a relatively tight policy footing. On the other hand we are not expecting any new dramatic tightening polices, unless it was in response to the market getting overheated again." -Head of Research for China, Jones Lang LaSalle, Michael Klibaner

The measures saw the central government raise the minimum downpayment for first-time buyers to 30 percent of a home’s value, from 20 percent. Banks were told to suspend mortgages on third homes or more.

The government also curbed the ability of foreigners to buy property in China. In early November, it announced that foreigners would only be allowed to buy one home in the mainland, and would have to demonstrate at least one year of employment in China prior to purchase.

Overseas companies were restricted to buying only non-residential properties, and only in cities where they were registered to do business. But that did not apply to companies whose core business is investment.

The central-government measures have cut into the number of transactions, with Knight Frank reporting declines spreading from first- to second-tier cities. In November, eight of the 10 largest cities reported year-on-year declines in sales volume. Beijing (down 52 percent over last year), Shenzhen (down 50 percent) and Shanghai (down 44 percent) were the hardest hit, and only Chongqing and Chengdu saw gains in sales volume.

However, prices have remained stable. After the very rapid rises in the first half of 2010 that worried policymakers, they inched forward in the second half of the year. Guangzhou Daily reports that overall gains were almost 24 percent for the year, citing unofficial research.

“Prices will be highly resilient,” one economist said, who did not want to be identified because he is not authorized to talk to the media. “Many developers tend to hold their property to avoid cutting prices. They believe the recent tightening measures focus on restricting home purchases by citizens may not be a long-term sustainable policy.”

Local governments will also resist property curbs, since land sales account for much of their revenue, he said.

China Vanke, the biggest property developer in the mainland, started the year on an optimistic note. It reported on January 4 total sales revenue for 2010 of 108.2 billion yuan (US$16.3 billion), up 70.5 percent over the previous year and ahead of its 80 billion yuan target.

That has helped its shares, traded in Shenzhen, begin the year with a bounce, up 5.8 percent in the first few trading days. It launched 21 new projects in December, taking it into new markets such as Wenzhou, Jiaxing, Nantong and Liaoning — the second and third tier cities many China watchers suggest have the most potential. It now operates in 46 cities in China.

“I have been in a lot of these places, and the lack of new modern housing is obvious, so there is tremendous opportunity,” Klibaner said. “That’s China. There is more than a decade’s worth of development ahead for these companies, not in Beijing and Shanghai, not in Hangzhou, but they’ll move from Tier 2 and down into Tier 3 or Tier 4 cities.”

China is expected to introduce a property taxover the next two to three years, though it is unclear what form that will take. Tier 1 cities are likely to see it implemented first. The tax would help local governments diversify revenues away from land sales. But it has long been expected, and often delayed.

Shares of developers got a boost early this year amid reports it may be put off again. That spurred gains in China Vanke’s major competitors such as Shanghai-listed Poly Real Estate Group, the second-largest developer, which has seen its shares gain 14.95 percent from the end of last year through Thursday’s close, and Hong Kong-listed China Overseas Land & Investment, up 6.85 percent so far this year.

Chongqing’s mayor surprised many in the middle of this month by announcing his city would introduce a tax on both new and existing homes, with Xinhua News reporting it would be introduced in the first quarter. Shanghai may also roll out its property taxin the first three months of the year.

Nomura Holdings has said it expect a levy of about 0.8 percent to be introduced first in Chongqing and Shanghai, with Beijing, Shenzhen and Hangzhou rolling it out later.