Laying down the law

China’s tough new measures to lower house prices (hopefully)

Laying down the law

Property slump ahead? They’re not buying it

Patience is not normally a virtue in politics. So perhaps it shouldn’t come as a surprise that – with regard to the property market – Beijing has finally run out of it. Fed up that previous measures have not curbed speculative activity as planend, policymakers have launched an all-out crackdown.

Like a general seeking to encircle his foe, it’s a four pronged attack. The main thrust is aimed at wayward developers. A punitive new directive says that property firms which are found to have hoarded plots – i.e. left them idle for more than a year – will be banned from bidding for more land, says the China Daily.

In further pincer movements the government has ordered banks to halt lending for third (and subsequent) home purchases, while also raising down-payment requirements for first-time buyers. It is also pressing ahead with plans to trial a property tax.

These measures are aimed both at increasing housing supply and at stopping speculative buyers from further driving up prices, said Qin Xiaomei, chief researcher with property consultancy Jones Lang LaSalle Beijing. On Wednesday, the Shanghai city government went even further, limiting each family to a single home purchase.

But are prices going to come down? Hard to say. The last time Beijing tried a more aggressive approach (in April), house prices actually nudged a little higher.

China’s nationwide housing price index has risen about 10% a year since 2001. Property has substantially outperformed China’s only other sizeable domestic savings alternative, stocks, which have returned one-sixth as much over the past decade, says the Wall Street Journal.

But analysts are worried that once the property party is over, the country is going to have to deal with a bigger problem: a huge oversupply of housing stock.

Years of bull-runs have led to overinvestment. In its latest report on the Chinese property sector, HSBC estimates that new housing supply will be 64% greater in 2011 than this year, adding 1,150 million square metres of property (an area equivalent to the size of Hong Kong).

The danger is that, as government efforts to cool the overheated sector take effect, the glut will likely lead to an inventory pile-up.

Those that think the Chinese property market is a giant bubble have resurfaced in recent weeks. Andy Xie, an independent economist based in Shanghai, is one of the biggest sceptics. In an op-ed for Bloomberg he estimates that average house prices in China’s larger cities are likely to decline by half or more. Land values will fall by much more. Zhejiang province, which Xie says is home to the biggest bubble, may drop 80%. In general, he forecasts a five year bear market.

So is Beijing ready for a long property slump? If falling prices hit construction jobs, the government may find itself under pressure to reverse course.

Current conditions are not hugely dissimilar to late 2007, when Beijng launched an earlier effort to cool the property market.

The economy started to slow sharply and half-finished constuction sites were commonplace. Policymakers changed tack and introduced measures that encouraged people to buy flats once again.

With the property market so crucial to the health of the economy, China’s government wants prices to stabilise.

But not to fall to the catastrophic extent that Xie predicts…

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