China on property alert even as prices ease

China on property alert even as prices ease

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BEIJING: China is keeping up its guard against the dangers of a property bubble despite growing evidence that prices are coming off the boil after a decade-long boom.

Steering the real estate market to a soft landing is a priority for China’s policy makers, caught between worries of speculative overheating and fears that brusque curbs could cause prices to crash and fuel unrest among a rising middle class.

The authorities have implemented a string of restrictions, including higher mortgage rates and larger downpayments. From June 1, a 5.5 percent capital gains tax is due to take effect on residential property sold within two years of purchase.

The People’s Bank of China expressed satisfaction in a report on Thursday that property lending and investment in real estate had eased considerably in the first quarter thanks to the curbs.

“But in some areas of the country the scale of investment in the property sector is too great, the structure of supply is not rational and prices of residential property are rising too quickly,” the central bank added.

Shanghai, China’s financial hub, is the main concern. More than 22 billion yuan ($2.7 billion) of overseas capital poured into the city’s property sector in the first 11 months of 2004, according to a separate central bank report. It said 76 percent of all loans in Shanghai last year went to the property sector. “Shanghai should guard against financial risks in the real estate industry and promote its development in a sustained, stable and healthy way,” the Economic Daily paper quoted the report as saying.

Shanghai slowdown: Yet even in Shanghai the government’s steps are blowing some of the froth off the market, property professionals say. The number of deals is falling and, in what they say is a striking change, sellers are being more flexible in their asking prices.

“There remains some concern by buyers over what the government may do in the future, which has led many to take a wait-and-see approach,” said Reed Hatcher, senior research manager at real estate firm DTZ Debenham Tie Leung. Figures compiled by China Index Academy, a property research group, support the anecdotal evidence.

Prices in Shanghai rose 14.78 percent in January from a month earlier. But they rose just 0.45 percent in February and fell 0.45 percent in March before rising 1.05 percent in April.

From a year earlier, the pace of price rises in the city slowed to 15.99 percent in April from 21.06 percent in January.

“Sentiment certainly seems to be that it’s time to be cautious,” said Michael Hart, head of research at real estate services company Jones Lang LaSalle in Shanghai. Hart said he expected prices to correct over the next six or 12 months. The luxury end of the market would probably be spared, but city-centre properties of lesser quality bought by overseas investors could be vulnerable, Hart said. “The declines wouldn’t be substantial, but it would be significant if they declined at all because it would be the first time that the market was taking a bit of a breather,” he said.

Rural exodus: China Index Academy’s figures for Beijing, another hot property market, paint a similar picture. After rising 5.86 percent in January from December, prices in the capital were flat in February. They then rose 0.69 percent in March and 0.49 percent in April, leaving them 7.12 percent higher than a year earlier.

“I think the new policies will play a role in curbing inflated prices, but in the long run the solution is to increase supply,” said Wu Xiang, a senior manager at China Index Academy.

Andy Xie, Morgan Stanley’s chief economist in Hong Kong, agrees. He says China needs to increase its urban population by 400 million over the next two decades as peasants leave the land, generating demand for five million flats a year.

If prices are too high, owner-occupiers who have bought their current flats from the state will be unable to afford to upgrade, leaving nowhere for the migrants to move into. “Hence, high property prices are very detrimental to China’s development,” Xie said in a report. Xie estimates that prices in many Chinese cities average 20 percent of urban per capita annual income per square metre. In developed countries the ratio is 3-5 percent, and perhaps twice that in other Asian cities, he said.

Source: Daily Times India