Beijing Moves To Pop Bubble
China issues real estate rules to fight speculation
By
Chris Oliver & Ilya Garger,
Last Update: 12:01 AM ET May 30, 2006
HONG KONG (MarketWatch) -- Policies unveiled by Beijing to curb speculation in the property market won measured praise from economists Tuesday, but might be too timid to deflate the surging real estate bubble.
China's State Council announced Monday that the down payment requirement on large apartments would be raised from 20% to 30%, and transaction taxes would be applied to properties sold within five years of purchase, up from two years currently.
The government is also tightening restrictions on bank loans to property developers in a bid to limit speculation and ease growing social tensions caused by soaring prices. The measures, jointly prepared by nine ministries, will take effect Thursday.
"It's better than I expected it to be," said Morgan Stanley's chief Asia economist, Andy Xie, of the policy announcement. "The government has learned a lot, and they know how important this is for social stability. They see people coming to Beijing to protest, and they've realized how serious this is."
Tai Hui, an economist at Standard Chartered in Hong Kong, said the new policies might be too conservative to be effective.
"This may not prove to be sufficient, but the government isn't willing to jump in the deep end at the start. The way they operate in China is to do it step by step, and try to engineer a soft landing," he said. "These measures leave room for further tightening if need be. If we don't see any significant reaction or slowdown, there's the possibility of a second wave."
Real estate investment in China grew by 20.2% year on year in the first quarter of 2006, according to Singapore-based bank DBS. Meanwhile, property prices in Beijing and the Pearl River Delta rose by more than 10%.
The impact of the new measures on Chinese property stocks was limited on Tuesday morning. In Hong Kong, the Hang Seng property sub-index was down 0.4%, in line with the overall market.
"If there is any setback for Hong Kong developers, it would be minor," said Andrew To, director of research at Tai Fook Securities in Hong Kong. "For the most part, the market has already priced in these new housing policies. But if there are any additional tactics to further discourage property markets, there may be further downside."
The State Council circular said the measures were to "promote the healthy development of the real estate market."
The new measures also include provisions to take back from developers land left idle for two years, and block loans to developers who fall below a 35% capital-adequacy ratio. Local governments will also be held responsible for controlling prices, while developers who manipulate prices or distort information will be liable to prosecution.
"Increasing down payment is good in terms of giving banks a bit more cushion if the speculative bubble bursts," said Xie. He added the moves show Beijing is more willing to tackle the worsening wealth gap. "People are terrified they won't afford a place for their sons to get married. China is just terrified of these prices."
Credit Suisse's chief regional economist Dong Tao said the measures were "psychological shock" that would slow home sales and dampen price escalation for six months. Longer term, he was skeptical they can cool speculative fever.
"The package has failed to touch the fundamental reason behind the property speculation -- excessive liquidity," said Tao.
He added the speculators were motivated to plow yuan into the property market, given that rental yields in major cities were 4% to 6% while bank deposit rates were near zero once inflation and tax levels are stripped out.
"In our view, half of the measures are to provide affordable flats for the low-income group, which should not affect prices but increase construction activities," he said. "The other half are targeted at speculation, which may pause, but is most likely to persist until monetary conditions are normalized."
He said cities such as Beijing may impose additional measures designed to cool prices in coming weeks in an attempt to mimic the slowing of Shanghai's property market in 2005.
Morgan Stanley's Xie said the measures failed to go far enough in tackling the presence of foreign investors.
"The overheating this year has a lot to do with the signaling effect from foreign investors," he said.
According to Standard Charterd's Hui, policies to limit supply might be counterproductive.
"Some of the measures seem a little contradictory," he said. "They're trying to limit number of large luxurious apartments being built, but that could actually fuel speculation."
That's particularly true if the problem of excess liquidity persists. In April, money supply grew at a faster than expected 18.9% year on year.
"There's still the question of where the liquidity is going to go," said Hui. "The money has to go somewhere."
