Talking Point

Trouble on the home front

Another round of property controls, fears of a housing bubble resurface

Please form an orderly queue: the new 20% tax sparked frenzied attempt to close real estate deals last weekend

Getting married and then divorced a fortnight later may suggest an over-hasty decision – perhaps the type taken in Las Vegas. But for one Chinese couple it was a highly calculated move. And as with most things in China, it relates to the property market – in this case to new rules on home sales announced last Friday.

Wang Ying and Du Bibo were interviewed by the Financial Times as they queued up at the divorce registry office in Shanghai’s Xuhui district this week. “We only found out about the new law when we went to the bank this morning to apply for the loan, so we rushed here to get divorced,” the couple explained to the FT.

Wang and Du were not alone. Waves of people filed for divorce this week to get round a raft of taxes and other related measures the government has launched to cool the property market. Marriage registrars in Shanghai and Nanjing saw record numbers of divorce applications in an unintended consequence of the changes.

Wang told the FT that the divorce officer advised them not to say they were getting divorced because of the new measures. “He said just make up anything else that makes sense, so we chose lack of feelings,” she explained to the newspaper.

So why all the divorces? It’s an elegant ruse to exploit a loophole in the new rules.

In this couple’s case, Du already owns a property under his own name in Beijing. The policy doesn’t apply to first-time buyers and sellers. So once divorced, Wang can buy their desired new apartment in Shanghai and then they can remarry again.

What are the measures?

The big headline was the State Council’s decision to levy a 20% capital gains tax on home sales. However, that wasn’t all. In cities where real estate values are deemed to be rising too fast other dampening policies will also apply, including higher mandatory mortgage downpayments and new restrictions on the purchases of second homes.

The moves come only a few days before Wen Jiabao is set to step down as the country’s premier, a position he has held for a decade and during which house prices have surged nationwide. Wen has spoken frequently about keeping prices affordable for homebuyers and the latest measures were his last chance to act. The Hong Kong’s Economic Times called it a “ruthless parting gift”.

The day after the new rules were publicised, sellers stampeded to list their homes for sale. Sina Property reported that vendors queued overnight in Tianjin to hand in paperwork to sell their properties. Similarly in Shanghai, hundreds of homeowners, many of them with title deeds in their hands, pushed their way into government offices to register their homes for sales, says Caijing magazine.

A new departure or more the same?

Shanghai Securities News says most of the tightening measures are nothing new. In fact, the 20% capital gain tax was instituted as early as 2011 but has hardly been implemented. So the latest announcements are more of a reiteration of an older policy, albeit with a greater likelihood of being enforced this time around.

Still, the directives took industry observers by surprise. “Friday evening’s announcement was very significant and beyond the expectation of many in the market,” said Hong Hao, chief equity strategist at Bank of Communication International Securities. “We are in a high risk zone now since property is a huge sector. This will have a ripple effect on other sectors in the economy.”

The government hasn’t released further details on when and how the new measures will be implemented. For example, managers at local branches of state-owned banks told National Business Daily that they haven’t received the official notifications requiring higher down payments or increases in interest rates for buyers of second homes. But property owners are not leaving anything to chance.

Others are worried about prices going up?

Many homebuyers are equally anxious to see their purchases completed. That’s because they fear that the new rules could trigger increases in price as some of the cost of the new tax is passed on to would-be buyers.

In Qingdao, the crowds thronging the housing office with paperwork were purchasers, the Peninsula Morning Post reported. An office staffer told the newspaper that his team had never been so busy. Buyers may also shift their attention away from the secondary market to new homes, where the tax doesn’t apply. This potential benefit for builders of brand new apartments has not gone without comment. “Are the new measures designed to help the property developers?” one netizen queried on weibo.

Could buyers be right to be concerned? Back in 2007, Dongguan, a manufacturing hub near Shenzhen, launched a similar programme to clamp down on property speculation, imposing a 20% personal income tax on second-hand transactions. Prices then went up as some of the tax was passed on to purchasers. And in a survey conducted by the People’s Daily this week, the majority of respondents thought that prices wouldn’t fall as a result of the tax: 10.2% said the measures wouldn’t be able to rein in prices; 29.4% were concerned about the likely increase in resale values; and 14.2% believed that real estate would definitely become more expensive.

On Sina Weibo, the new clampdown was widely criticised. Popular blogger and real estate tycoon Ren Zhiquang said the increases both in the interest rates buyers will face and the upping of downpayments were akin to “directly stealing money” from the propertied class; on the other hand Pan Shiyi, another major real estate developer, said the new intiatives would only lead to rising prices in the secondary market – since the reluctance to pay the tax would restrict supply.

Will the measures be uniformly enforced?

The Jinan Daily doubts it: “While the regulations leave room for flexibility, they tend to be short-lived and inconsistent. And more often than not, they start off strongly and quickly fizzle out. Clearly, this makes it very difficult to have any real impact on the property market.”

In particular, commentators believe that local governments will be reluctant to implement the new rules. In 2010 the central government tried to encourage a similar property tax in a number of cities but faced widespread resistance. Only Shanghai and Chongqing adopted the directives.

In fact, during Wen Jiabao’s premiership at least nine rounds of real estate controls were announced. But prices kept on rising, leading to questions about the effectiveness of the numerous new policies. “There is a fundamental contradiction,” says Yin Bocheng, director of the real estate research centre in Fudan University. “While the central government wants regulation, local governments want higher housing prices, which bring them land revenues.”

But is there another bubble in the market today?

That remains a contested issue. Indeed it was contentious enough to prompt open warfare between two commentators on CNBC this week, when news anchor Maria Bartiromo had to cut short an interview to stop the squabbling between her two guests, Ann Lee from New York University and Peter Navarro from UC Irvine.

Lee and Navarro were sparring angrily over whether China’s property bubble was about to burst.

But is there a bubble? The data is mixed. China Real Estate System, a consultancy, reported a 2.5% increase in the 100 largest cities in February year-on-year. That was up on January’s 1.2% pace. February was the third month in a row of year-on-year increases and the ninth-straight month of month-on-

month growth. Average prices for property in Shanghai were up 41% year-on-year in the first two months of 2013, and values in Beijing were also rising fast.

Wang Shi, chief executive at the developer Vanke, told CBS News at the weekend that the sector was already in a bubble state. However, he warned that the problems would be worse if the bubble were to burst, calling that a “disaster“.

But it is too simplistic to come to a single conclusion about China’s property market. In reality, the real estate sector is going through a polarising process, says Gu Yunchang at the China Real Estate and Housing Research Association. First-tier cities like Shanghai and Beijing are suffering from chronic shortages of housing for low to middle-income residents. But many third-and fourth-tier cities, are struggling with an increasingly severe oversupply.

Take Tangshan, a city known for its steel mills, where the Financial Times reckons that it will take a decade to find buyers for all the new homes built since 2009. With the showrooms empty and developers already cutting prices, the latest measures might exacerbate the the city’s problem with surplus supply. The Economic Observer is reporting a similar situation in Yingkou, a third tier coastal city in Liaoning province, where 42 major projects will release 14 million square metres of residential space into the market. At sales rates of 2011, it will take at least six years to dispose of it all, the EO calculates.

The newspaper also warns that fourth tier cities are most at risk. Be cause of pre-existing purchase restrictions, many developers have refocused their efforts on smaller, inland cities, where they have been welcomed by local government offerring favourable policies and cheap land. But many of these cities also have population outflows, as residents move to wealthier parts of China in search of work. The result is lots of unsold inventory, with little prospect of sale.

Of course, WiC has written previously about some of the worst instances of apparent oversupply in “ghost cities” that seem to lack any residents at all. But discussing how the real estate market in these locations compares to Shanghai or Guangzhou isn’t immediately useful because patterns across the country lack national consistency. In the same way, extrapolating what is happening to UK property prices on the basis of activity in central London is equally meaningless, and even more so for prices across a larger market, like Europe. How to correlate Sicily with Strasbourg, for instance?

There is similar confusion when it comes to the definition of the “bubble” that Chinese property is said to be experiencing. Some analysts talk about real estate being in bubble territory because of the continuing price rises in cities like Shanghai and Beijing, despite policy initiatives designed to hold the market in check. Here, the suggestion is that prices cannot continue to rise at current rates, often on the basis of affordability. But other commentators are focusing on places like Tangshan and Yingkou, where it is unsold inventory rather than price surges generating the concern that the market is due for a major correction.

Developers to face difficulties?

Not surprisingly, the day after the new measures were announced property stocks like China Vanke, Poly Real Estate and Gemdale all plunged to the daily 10% trading limit. The Shanghai property sub-index fell 9.3% the same day, its biggest daily loss since 2008.

That might have been an overreaction: as noted previously, new home sales aren’t included in the tax as it is currently defined. Developers have also replenished their finances in expectation of tougher times ahead. Many have tapped the bond market this year to strengthen their balance sheets, raising more than $6 billion in bond proceeds, compared with $3.3 billion in the fourth quarter of 2012. Insiders say that bosses will hold off on cutting prices as long as cashflow pressures can be contained.

The developers will also be counting on another powerful trend: mass urbanisation. China’s city population is projected to increase by 200 million this decade, which translates into a need for about 10 million new residential units every year as migrants move to cities and current buildings age and need to be replaced. This trend, as well as further expansion in money supply (it has been increasing 15% year-on-year in China), leaves many feeling more bullish about the market’s prospects.

The FT’s Simon Rabinovitch also thinks talk of a real estate bubble misses the point.

China, he comments, now has a two-speed property market. Prices in the big cities are going up, while those in smaller centres are going down. A one-size-fits-all categorisation of the Chinese property market therefore doesn’t apply. “China takes bifurcation to a new extreme,” he concludes.


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