China’s residential property prices have remained resilient despite government tightening measures

China’s residential property prices have remained resilient despite government tightening measures because of a number of loopholes, according to a report from ratings agency Fitch Ratings.

The Chinese Residential Real Estate Q and A highlights the measures employed by the government, and looks at the reasons why they are failing. For example, the central bank cut lending limits for mortgages, but this has not had as much as an effect as it should have because many buyers are cash buyers. According to the report, Fitch estimates “that this proportion of cash payment is in the region of 30% to 50% of new-build purchasers.”

Another mortgage condition that has been introduced is the banning of financing on second and third properties, but, according to Fitch, “families may arrange their purchase to evade this restriction, through extended family members or artificial divorce.”

Developers have also been hit with curbing measures – banks are prevented from lending to developers for the purchase of land, so they can only borrow to construct. However, according to Fitch, “developers can still raise equity, domestic bonds or offshore funds. Discipline on the lender side may be more patchy for smaller, rural banks where local governments may be more influential.”

Tax increases on homes sold less than five years after purchase have also failed, because the returns are so good that a 5% tax is not enough of a deterrent. Fitch’s report says: “Tax rates in this bracket are not a major deterrent for those looking to long-term appreciations, or if short-term appreciation expectations are above 15%.”

Fitch Ratings says the overall effect of these measures has been to drive people away from major metropolitan areas towards China’s interior, and the demand has simply been exported. OPP recently reported on the rising home values in the interior of mainland China. During February, the price of a new home in the central city of Yueyang jumped by 12% year-on-year according to figures from the Chinese National Statistics Bureau.

The government is now monitoring home prices in 70 cities. The western city of Lanzhou rose 11% in February versus 6.8% in Beijing for instance, while Shanghai rose only 2.3% … a lower rate of increase than 80% of the cities tracked.

“Strict property measures in major cities have driven buyers to smaller cities,” says Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group Ltd. “That raised inflation pressure in those cities.”

One measure that has been effective thus far is residency limits, for example to buy a property in Beijing it is necessary to show five years of tax returns. Fitch’s report says this is “extremely effective in the near-term, driving sales volumes down significantly.” However, the report questions how sustainable this policy will be long-term and how it will fit into other government policies including labour mobility.

Sales and prices increased last year, according to the latest figures. China Vanke Co, the largest real estate company in China, said its sales in 2010 rose 70.5% to 108.2 billion yuan. The country’s second largest developer, Poly Real Estate Group Co, revealed a 52.53% increase in sales in 2010, totalling 66.17 billion yuan. The third largest, Gemdale Corp, also posted an increase in sales of 34.6% to 28.34 billion.

Prices were up 7.7% year-on-year in November in China’s 70 cities, according to figures from the National Bureau of Statistics. The housing market in China looks set to grow, as the country continues with its economic expansion. The World Bank’s predictions, which were released this week, forecast 8.5% growth in China this year. The report said: “East Asia is well positioned to enjoy further years of strong – albeit more moderate growth over the period to 2012. China will remain the focal point of regional activity.”

Source: OPP

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