China’s new leaders are inheriting a challenge that stymied the outgoing government: deflating a bubble in big-city home prices without damping economic growth.
In one of its final acts before the leadership change, China’s State Council on March 1 imposed tough new measures intended to cool the market, a step that sent property stocks tumbling. While curbs initiated last year had some success, prices resumed climbing in the second half as the central bank cut interest rates to reverse an economic slowdown.
Real estate and related industries such as construction account for about a fifth of China’s gross domestic product, while cities, especially smaller ones, rely on land sales to raise revenue. The country’s leaders are searching for ways to address the mounting frustration of ordinary Chinese struggling to afford a home while minimizing wider economic damage.
“Beijing recognizes that there are bubble conditions in many major urban real estate markets and wants to be seen as responsive to public concerns about rising home prices,” Nicholas Consonery, Asia analyst at New York-based consultancy Eurasia Group, wrote in a note on March 6. “But the new leadership is well aware of the dangers of freezing the nationwide market and causing a bigger slowdown in growth.”
Home prices rose for a ninth month in February, extending a rebound in the second half of 2012 after interest rates eased. Premier Wen Jiabao, who today was succeeded by Li Keqiang, vowed to keep housing affordable during his 10-year term. Still, home prices climbed 1.5 times from 2003 to 2012 to the highest since China privatized home ownership in 1998.
The new leadership will maintain the real estate tightening measures Wen initiated, said Zhu Haibin, chief China economist at JPMorgan Chase & Co.
“Wen’s property polices in the past 10 years couldn’t be counted as successful,” said Hong Kong-based Zhu. “The property-tightening measures will continue under the new administration, but before Wen goes, he certainly wants to give them a push.”
The government has taken multiple steps since it first began to tackle surging property values in April 2010. It raised down-payment and mortgage requirements; imposed its first property tax, in Shanghai and Chongqing; and enacted restrictions in about 40 cities, including limiting the number of homes people can own and requiring new residents of a city to wait a year or more before buying a home.
In the latest measures, the council, China’s cabinet, ordered even higher down-payment requirements and interest rates for second mortgages in cities where price gains have been “excessively fast.” The council said it will study the cities that have piloted the property tax and accelerate and widen the trials, and told local authorities they must release price- control targets in the first quarter. It also warned real estate companies found hoarding land or collaborating to push up home prices that they will be barred from new development loans or raising funds in capital markets.
In addition, it is cracking down on individuals avoiding a 20 percent tax on profits from sales when the original purchase price is available, a levy many only pay a fraction of by feigning they can’t provide the data -- a common practice in cities where prices have escalated the most.
The Shanghai Stock Exchange Property Index (SHPROP), which tracks the shares of 24 Chinese developers, has fallen 11 percent since the March 1 measures, extending its decline this year to 13 percent. The benchmark Shanghai Composite Index (SHCOMP) rose 0.4 percent in 2013, compared with the 5.2 percent gain by the MSCI AC Asia Pacific Index (MXAP).
The property index fell 0.9 percent to the lowest in three months at the local close today.
The recent measures don’t tackle the real issues in the property market, said Yao Wei, China economist at Societe Generale SA in Hong Kong. Yao is ranked by Bloomberg as the most accurate forecaster for quarterly gross domestic product.
“Property measures have been restated over and over again,” Yao said. The latest statement “is stronger than expected as the government sent a signal that they are still serious about the tightening. But it is only targeting the superficial problem of home prices. It still hasn’t taken out the speculative demand and the fiscal reliance of local governments on land sales,” she said.
Yao estimates China’s economy will expand about 7.8 percent this year, as tightening in the property market is likely to prompt banks to pull back on mortgage lending. China set an economic growth target of 7.5 percent for this year, unchanged from 2012.
The world’s second-largest economy posted 7.8 percent growth last year, the weakest expansion in 13 years and down from the average 10.6 percent rate over the previous 10 years. Economists surveyed by Bloomberg News forecast a pickup to 8.1 percent growth this year, based on the median estimate.
The curbs are the firmest since the central government in February last year made the cities of Wuhu and Foshan abandon attempts to lift restrictions imposed by policy makers in Beijing. China’s cities, especially smaller ones, got at least 21 percent of their revenue from selling land last year, according to Zurich-based UBS AG.
Initially, the measures appeared to have worked. Home prices fell for nine straight months from September 2011, declining 2.8 percent over the period, according to SouFun Holdings Ltd. (SFUN), the country’s biggest real estate website owner, which tracks prices in 100 cities.
They picked up again in the second half last year as central bank rate cuts helped boost developers’ sales and prompted ratings company Standard & Poor’s on Feb. 20 to raise its outlook for residential builders to stable from negative.
New home prices climbed 0.8 percent to 9,893 yuan ($1,590) per square meter (10.76 square feet) last month from January, SouFun said. Prices in Beijing rose 6.8 percent in February from a year earlier and 3.1 percent in Shanghai, according to SouFun. The eastern city of Heze in Shandong province posted the biggest gain, up 18 percent, in February from 12 months earlier, followed by the northwestern city of Urumqi, where prices increased 12 percent.
Apartments in Shanghai, the nation’s financial hub, cost more than 45 times average salaries, Wang Shi, chairman of China Vanke Co. (000002), the country’s biggest homebuilder, told the U.S. television news show “60 Minutes.” Wang said there was a “bubble” that could spell “disaster” for the Chinese property market, adding that that the debt of developers is a serious problem.
Vanke, which builds small and medium-sized homes that have proven more resilient to the curbs because they target first- time buyers, said sales rose 28 percent in February after increasing 56 percent in January from a year earlier. The company’s profit jumped 30 percent last year.
Wen maintains the government has been successful in tempering price growth: “In the past five years, we kept a firm grip on the real estate market and kept housing prices from rising too quickly,” he said in his working paper at the start of the National People’s Congress.
Among the roughly 3,000 members of China’s legislature are some of the nation’s most powerful politicians and executives, wielding power in their home provinces and weighing in on proposals such as whether to impose a nationwide property tax.
“The new measures will ‘freeze’ the entire market and delay the originally planned sales schedules planned for the near term,” Eva Lee, a Hong Kong-based property analyst at UBS, wrote in a report on March 4.
Property sales will slow down “immediately,” billionaire Vincent Lo, chairman of Shanghai-based Shui On Land Ltd. (272), which develops high-end residential and entertainment precincts, said in an interview in Beijing on March 6. Lo, a member of the government’s advisory board, also said curbs in the past decade have been unsuccessful.
“Our sales will slow down,” Lo said. “But there are a lot of things unknown depending on the policy implementation and how the market is digesting it.”
At least 34 cities are expected to tighten home-purchase restrictions following the latest measures because the policies have only covered parts of the cities, Jinsong Du, a Hong Kong- based property analyst at Credit Suisse Group AG, said in a note to clients on March 4.
Some have already started. The southern business city of Shenzhen said it is taking steps to guide developers in setting “reasonable” prices and is implementing the central government’s measures to ensure prices don’t rise too quickly. Changsha, also in the south, banned loans from the housing provident fund for second homes if applicants’ first homes are larger than 120 square meters, China National Radio reported March 13, without saying where it got the information.
Investors are becoming more cautious. Industrial Securities Co. and CIMB-GK Securities Research both downgraded China’s property sector to neutral from overweight, saying the measures are stronger than expected.
Mizuho Securities Asia Ltd. recommends avoiding developers with high leverage or slow sales momentum, such as Evergrande Real Estate Group Ltd. (3333), Agile Property Holdings Ltd. (3383) and Guangzhou R&F Properties Co. (2777) The brokerage likes those with a solid sales outlook and market share, such as Country Garden Holdings Ltd. (2007), the Foshan, Guangdong-based homebuilder Mizuho says will benefit from the government’s urbanization push, which will favor satellite cities, where the company is dominant, over mega-sized cities.
CLSA Asia-Pacific Markets said it was a good time to buy the stocks of national developers, such as Hong Kong-listed China Overseas Land & Investment Ltd. (688), as big state-owned builders with diversified portfolios will not have much of a direct impact from the policies.
“The curbs would be more drastic in the first-tier cities, because there’s a huge undersupply,” Nicole Wong, a property analyst at CLSA in Hong Kong, said in a Bloomberg Television interview Feb. 22.
China’s housing sales rose 11 percent to 5.4 trillion yuan ($869 billion) last year from 2011, while new housing construction starts declined 11.2 percent, according to the statistics bureau.
Property, construction and related industries account for about 20 percent of China’s gross domestic product on average, according to estimates from Societe Generale.
The latest curbs “reflect a continuing struggle to balance popular disquiet over rising real estate prices against the meaningful role that the sector plays in driving economic growth,” Washington-based Consonery said. “China’s new leaders are focused on economic stability and political consolidation in 2013, and those priorities will make them less likely to tamp down on real estate this year.”
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