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Too Hot to Cool Down?
In the wake of official cooling measures, is Beijing’s property market responding?
| Text : Elizabeth Kerr | Photo : www.thinkstockphotos.com |
It feels like just a few months ago China’s property market was flirting with all time price highs and transaction volume. Prices were skyrocketing and eventually panic, talk of bubbles and crashes started until finally the central government took action. In April 2010, Beijing introduced a number of cooling measures designed to calm down an overheated market and bring a semblance of normalcy to property industry. Six months or so down the road, with prices still hovering at record levels, the question has to be asked: Did the cooling — or austerity — measure work?
The short answer for Alan Chiang, Head of Residential property for China at global property research and consultancy DTZ in Hong Kong is, “No.” But like all things dealing with Mainland China, it’s not quite that cutand- dried.
China’s residential market in September 2010 was as strong as it’s ever been. New home sales in first tier cities like Beijing, Shanghai and Guangzhou rose just better than 80 percent over August, and around 24 percent in second tier cities like Tianjin, Chengdu and Shenzhen — and that’s also up from the second quarter overall. Given those numbers, it would appear the spring’s cooling measures did little to dissuade buyers or inject sanity into the market. “The austerity measures introduced in April 2010 only worked for a short period of time, as developers were not co-operative enough,” Chiang theorises. “[They] have simply deferred their launches, thus further reducing new supply. In addition, few of them have adjusted their prices.”
On top of that, measures designed to bring prices down to manageable levels and stave off massive speculation may have had little impact on buyers in that category. As Chiang points out, “Many buyers, investors included, were cash rich and relied little on mortgages, particularly in high end sector,” he says. That was only one factor among many that prevented the measures from doing their intended job. “Worsening inflation and negative interest rates have urged buyers in the pipeline to act. The general public was not convinced that the austerity measures would bring prices down. Provincial governments were not firm in implementing the measures,” Chiang finishes.
With April’s measures up and running, the central government added to the regulations. Whether or not it was due to the lack of efficacy is anyone’s guess, but, “After the quiet months of May, June and July, the residential market began to regain its momentum from mid-August and substantially rebounded in September,” Chiang reiterates. Measures introduced around the National Day holiday were designed to reinforce April’s and included tightened mortgage lending criteria,purchase quotas, direction to provincial administrators to enforce the rules (not doing so is considered a “dereliction of duty”), and the last-ditch property holding tax, which is currently in the pilot stage.
While it may be too early to draw definitive conclusions, the impact of the second round of measures is being felt nonetheless. “The most powerful austerity measure in this round is indeed the ‘purchase quota’, meaning each family unit can only purchase one more property in their home city from now on, theoretically whether or not they are paying cash,” explains Chiang. “If the family unit is purchasing a third, or above, home and applies for a mortgage, the answer is simply ‘No.’ The restriction also applies to cross-city purchases and therefore investment purchases would be substantially suppressed.”
Further to that, purchasing patterns are shifting, however subtly, and could indicate a broad cool-down. Genuine end-user buyers as well as investors are becoming increasingly selective in their purchases, which is to be expected when one’s options are limited. As if that weren’t enough, “The increase of down payments from 20 percent to 30 percent for first-time buyers has in fact deterred those with limited financial resources, even for genuine use,” remarks Chiang. The demands on second home buyers is even more intense, where 50 percent down is now required.
For all the deterrents Beijing has proposed, and may still, was it really necessary? Chiang thinks so. “Although there was a price adjustment of 1.6 percent and 3.1 percent for Tier-1 and Tier-2 cities respectively in quarter 3 2010 (QoQ), it was only minimal as compared to the price increment in the previous 18 months,” he points out. “The average new homes price in Tier-1 cities in September 2010 is 23.5 percent above its last peak level,” and over 30 percent in Tier-2 cities. Following the financial crisis of 2008, new construction has slowed, resulting in a shortage of new supply beginning in mid-2009. And as we all know, supply and demand form the foundation of the property market’s ebb and flow. New builds in 2010 are expected to increase, but nothing will be available until at least the middle of 2011. “Before then, timely austerity measures to cool down the market have become necessary,” Chiang argues.
So is anyone really benefiting from all the measures? Are middle-class Chinese and mid-range executives with families suddenly able to afford homes? Or are the measures just another way cash investors have an advantage over everyone else? It may seem trite, but only time will tell but for now it seems like none of the above. To Chiang’s mind, “For developers, while bank lending is tight, other fund sourcing is scarce, and sales are expected to be slow, only those Central and provincial state-owned enterprises, as well as big real estate players, will be in a better position and have the resources to struggle on. If the quiet market persists for some time, we would expect more acquisitions in the industry.”
Though the market’s response to the austerity measures is still in “wait and see” mode, there has been marginal price movement. The September DTZ China Residential update indicated that despite a recent rally, new home prices in Tier-1 cities did indeed drop that month by an average of just under 4 percent — however they went up in Tier-2 locations — but there was an overall drop across the board between the second and third quarters of 2010. “Further price correction, though moderately, would be inevitable, especially towards early 2011 amid a flood of new supply.” As the saying goes, it’s not over yet.
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