Down and Dirty with the Property Recovery - China

It has been said that a government has limited control over what it can do to influence things like property price growth, but this isn't so in China, it has near-total control. After easing us in gently from April 2010...

We all know of the growing void between capital and major cities, and the rest of the countries in which they stand when it comes to wealth, prosperity, property price growth and such like. These differences tend to be more pronounced in emerging markets than established ones, and the gaps are particularly big in the emerging markets of Asia.

Take China for example. The Republic of China is the largest country in the world in terms of population size (according to Wikipedia it has 19.5% of the world's population, compared to 4% in the US), and it also has one of the biggest wealth gaps despite its communist ideals. In Shanghai and Beijing people are generally increasingly prosperous; they have good jobs paying good wages. But in rural areas and outside the main wealth centres the majority of the population is still living in abject poverty.

This makes profiling the Chinese property market on the national level very difficult indeed. Sure, with any market the national overviews fail to take into consideration regional variations, but in China it is not regional variations so much as a stark divide between the major cities and everywhere else. Nevertheless we can take a stab at it.

The first thing to say is that, unlike those previously covered in this series, namely the UK and US, we are not really talking about a fairly new recovery, in fact that opposite is true. China's economy and property market continued to grow throughout the financial crisis, so much so that the property market actually overheated and the government was forced to intervene, and now we are in an anti-recovery - if China's property market were a hospital patient it would be in a medically induced coma. But again, this is primarily only in the cities.

During 2009 and 2010 Chinese property prices grew by 13% on average. This isn't a great deal compared to the 30s and 40s percent growth we had out of the likes of Ukraine and Estonia when they joined the EU, but combined with rapid credit escalation, consumer price inflation, and also the huge wealth gap the communist government saw it as a danger to the wider economy and stepped in.

It has been said that a government has limited control over what it can do to influence things like property price growth, but this isn't so in China, it has near-total control. After easing us in gently from April 2010, the government intensified in 2011 and eventually put a stranglehold on the market. Last year saw the minimum down-payment for first time buyers put up to 30% from 20%, for second home buyers it went up to 60% from 50% and mortgages for subsequent purchases were banned altogether. This was followed by area restrictions on purchases, credit quote limits and more interest rate hikes. But the clincher was the new property taxes in Chongqing and Shanghai.

Buyers would pay between 0.4% and 0.6% in additional taxes when buying in Shanghai, and between 0.5% and 1.2% on luxury homes and newly purchased high-end homes in Chongqing. On top of that buyers who had no affiliation with the city in terms of work or business were asked to pay a further tax. Finally, the PBOC benchmark lending rate was raised for the third time in a year to 6.56% in July 2011.

But that is only the legislation aimed at cooling the market from the buyers side, one side isn't exactly a stranglehold. However, the government also targeted developers, increasing their taxes and limiting their credit. So, when the legislation started to have an effect on buyers, developers were hit from all sides with falling demand and restricted credit flows, they were forced to drop prices. The first drop was a 20% slice off new build prices in several developments in Shanghai, a move which led to angry protests from buyers who had just bought at the higher price.

Prices have now been falling since September. Apartments in Beijing are a prime example of the turnaround, according to the national statistics bureau Beijing apartments saw their value fall by 13.5% on average in the year ending October 2011, almost reversing the 18% growth recorded in 2010.

The falls are intensifying. According to the National Bureau of Statistics house prices fell in 49 out of 70 cities in November, compared to 33 out of 70 in October.

But the government has voiced commitment to stay on the current path until house prices come back down to a "reasonable level". In December, following the Annual Central Economic Work Conference in Beijing the government said:

"China will stick to property tightening policies, push home prices back to reasonable levels and speed up construction of ordinary commercial homes to increase effective supply."

The sentiment was reiterated by Chinese Premier Wen Jiabao this week when he said that the government must continue with macroeconomic controls, consolidate its property tightening campaign and bring about a "reasonable" correction in housing prices.

- Wednesday 15 February 2012

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