China property market has now become a bubble. This is now turned into a fear which is expected to burst and shake the world economic recovery in the coming days. But now we can be relaxed to a certain degree that China have recognized this rising dragon and is making polices to control the dragon.
China has developed new reforms to control the dragon of bubble which took birth from real estate property prices. Its new policies are quite capable to control the dragon but much depends on the real figures that will come up in the coming quarters in China economy. The prices of home in 70 major Chinese cities rose 5.7% from a year earlier in November, the fastest pace in 16 months. The property market was a prime driver of the economy’s 8.9% growth in the third quarter.
The below chart shows the price chart of Chinese real estate.
The biggest house price rises are coming from the main cities of Beijing, Shanghai and Shenzhen. The investment in this sector is also the highest among all other sectors in china. In china the property investments alone accounts for about 12% of China GDP. Higher amount of investments have also resulted to a series of apartment projects being developed by companies such as China Overseas and China Vanke will likely be completed next year. Some developers have also resumed their projects this year after putting them on hold for months during the global economic downturn.
The demand for residential properties was already rising rapidly by March 2009. In that month housing sales were up by 36% on a year earlier. Even in 2007 the residential property prices in China had soared. Home prices are likely to climb 15 per cent next year, spurring revenue growth for developers. This could boost the prices for some real estate shares by 30 and 50 per cent in the next six months
If we get in to the historical property prices of China we find that in 2001 and 2002 period china made easy policies for expansion of the market. They allowed foreigners to freely own properties in 2001 (2002 in Beijing).The government restricted ownership to resident foreigners who have worked, studied or lived in China for at least a year. The property can only be used for personal purposes and not for rental.
This policy in 2001 and 2002 has created the journey of boom phase of Chinese property market.
When we look into the present market there are number of factors which drive the price of property upward.
- Ample amount of liquidity and that also cheap money is deriving the investments in the real estate sector.
- Real estate investment jumped by 28.% on a yearly basis, topping 989 billion yuan ($130.7 billion) in the first six months, according to the NDRC
- The interest rate is rather low now
- Other asset classes are very prune to risky levels. Like gold equities and currency.
- During recession times the price of the properties came to record levels low. Residential property prices in Beijing slid by 2% (3.2% in real terms) in 2008.
- Shanghai house prices stagnated in this period in real terms. In nominal terms, prices rose by 2%.
- The government announced a CNY4 trillion (US$585 billion) stimulus package in November 2008, with allocations for housing and infrastructure projects, manufacturing, education, and industry.
- The property deed tax rate for first-time home buyers was reduced to 1% from 1.5% from January 2009 to December 2009, if the area of the residential property bought is less than 90 sq. m.
- Stamp duty and land value-added tax was waived for individuals purchasing residential properties from January 2009 to December 2009.
- If residential property is held for more than two years, the seller is exempted from the 5.5% business tax.
- Lending conditions were made cheap in recession times like the down-payment for mortgages of first-time buyers was lowered to 20%, and the floor interest rates for home loans was lowered to 70% of the benchmark lending rate.
• So once the recovery of the Chinese economy took place the surging growth in property market of china resulted to a bubble where supply went ahead of demand. Where prices soared to in the country’s 70 large and medium cities rose by 7.1% on a yearly basis. The below chart shows the interest rates that drived the cheap money to flow in this sector.
So now the china is laying down the ground work to control the dragon of property bubble. It introduced new policies to suck out the bubble without harming the economy.
A quick look at the policies:
- Developers must now make a 50% down payment while acquiring land.
- From January 1 sales tax on homes sold within two years of purchase has been imposed slashing the time period from five years.
- The taxable period on home sales to five years from date of purchase.
- The government would re-impose the 5.5% tax on sales of homes bought less than five years previously to discourage speculation.
So what it means for equity markets. In one word protection from the bubble which was about to burst out. Now we need to keep a tab on how much the real affect of the new policies will have on the real estate growth sector. China is also curbing other dragons of asset bubble in automobile, steel, cement sectors respectively. In my next article I will throw light on Indian real estate followed with Chinese new policies to control the dragon.
Authored by: Indranil Sen Gupta
Financial, Economic Writer and Research Analyst.
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