Chinese Real Estate: The Jewel of Asian Investment Losing its Sheen?

During the financial crisis the reports were near constant of soaring Chinese home prices. Then the reports began to focus on the potential for a bubble and whether the government would intervene...

The Chinese economy is a powerful force, and until recently it was the ultimate emerging market investment, especially in Asia. High risk, yes but practically every fund or property investor worth their salt would have a moderate-high level of exposure to China. But with the government looking set to cause a controlled boom bust cycle in the property market, is China still the prime property investment in Asia?

The Chinese economy sure looks precarious. Annual growth was 7.7% in the January to March quarter, compared with 7.9% in the previous three months. Analysts had forecast a figure closer to 8%. This slowdown is despite government efforts to spur growth after it hit a 13-year low in 2012, including 2 interest rate cuts since June last year and approval for infrastructure projects worth more than $150bn (£94bn). Moody's has just lowered the outlook on Chinese debt from positive to stable.

While the Chinese economy is on a life support machine, the property market is on a rollercoaster.

During the financial crisis the reports were near constant of soaring Chinese home prices. Then the reports began to focus on the potential for a bubble and whether the government would intervene. This was shortly followed by a focus on how the government intervention was first failing in its aim, and then how it was strangling the growth out of the market and endangering the very future of the Chinese economy. At first the government insisted that the economy was safe and it would continue with its wholly necessary restrictions on the housing market until prices came down to a reasonable level. The government also insisted that by being hard on the property market now it was averting a much bigger economic catastrophe.

It changed its tune when 2012 (as said above) began looking like the slowest year for the Chinese economy in 13 years. As of March this year Reuters recorded an 8 month trend of growth in the Chinese property market. The turnaround can be traced back to sporadic growth in June and July.

So, the market is growing again… Great. Don't get too comfortable though, as that looks like simply the climb before another drop. According to the latest news major cities across China are enacting new regulations designed to discourage speculators and "calm soaring home prices".

Beijing, Shanghai and Chongqing were among the jurisdictions that presented new restrictions on buyers, after "a month of heated debate, guesswork and worrying," Xinhua reports.

In Beijing, single adults will be allowed to buy only one apartment and the government increased the minimum down payments on second homes.

"The move is aimed at meeting the needs of self-occupancy home buyers, given the limited supply," Wang Rongwu, deputy director of Beijing Municipal Commission of Housing and Urban-Rural Development, told China Daily. "It will also help to curb investment-oriented purchase."

Shanghai also increased the required down payment for second home purchases and banned banks from offering loans to locals for a "third apartment or more," according to Xinhua. All the local governments said they would strictly enforce a 20 percent capital gains tax and higher down payments for second-home buyers, following the government's stated plan to curb rising home prices, the local media reports. The new rules will go into effect immediately, Xinhua said.

In all fairness, while it looks like a rollercoaster now, but China home prices increased by 160 percent from 1998 to 2011 and despite the cooling measures prices increased again in 2012. But having said that, growth is one thing but investors need more than growth, across Asia you have markets that give great growth with a lot less uncertainty. The Philippines, Malaysia, Thailand, even Indonesia all offer rewarding investments without the rollercoaster or Communism. Malaysia particularly has a record for solid growth over the long term, while Indonesia is the one to watch if you want ferocious growth prospects.

- Friday 19 April 2013

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