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Grip on Property Market should not be Loosened

China’s property market has reached a turning point.

Thanks to the government’s longer-than-expected austerity measures, including a ban on second-home purchases in big cities such as Beijing and continual increases in lending and mortgage rates, cash-strapped property developers have begun to throw the towel. They have cut prices one way or the other to clear their large inventories to replenish their shrinking capital pools.

As a result, property prices have showed more signs of correction.

In October, the average price for a second-hand apartment in Beijing stood at 22,183 yuan (US$3,489) per square meter, a decrease of 2.9 percent from a year ago, according to figures compiled by 5i5j, a leading property agency. The price was 11.6 percent lower than the level in July.

According to official figures, a total of 6,698 residential properties were sold in Beijing's secondary market in October, a traditional peak season for property transactions. The volume was the lowest level so far this year in the city.

In Shanghai, about three hundred homeowners stormed into the sales office of a project developed by Longfor Properties Co. Ltd. to ask for compensation after prices fell by as much as 30 percent since they signed sale and purchase contracts.

The protest came after the developer's agressive promotional policy which it started on Oct. 15. Under the marketing ploy, homebuyers were offered a total discount of 300,000 yuan if they would spend 20,000 yuan for membership in a designated website. The policy could bring down the average price per square meter by 20 to 30 percent, according to the developer.

On Oct. 22, a separate group of homeowners gathered outside the sales office of China Overseas Property Group Co. at the Pudong New Area to protest the firm's decision to slash the price of units to 17,000 yuan per square meter from 23,000 yuan per square meter.

Although the price cuts were mostly applied to properties on the outskirts of big cities, they showed that property developers were under increasingly tight cash-flow pressures.

And if the government’s tightening policies are maintained, it is very likely that the price cuts will be extended to more properties in core areas in big cities, and ultimately drag down prices in the overall market.

That will definitely be good news for a country that has in recent years relied too much on property bubbles to spur its economy.

However, an official’s remarks on Oct. 27 cast doubt on whether the clampdown will be kept.

Jiang Weixin, minister for housing and urban-rural development, said restrictions on home purchases will be phased out after the nation completes a database of property ownership and other related housing information.

Calling the restrictions administrative measures, Jiang told lawmakers at an inquiry meeting that his ministry is trying to collect information to regulate the market.

Jiang’s comments conveyed an important message. That is, the Chinese government may have been considering lifting the purchase ban.

That is in fact a precarious thinking.

China tends to regard the property market as a silver bullet to fight economic slowdown. During the 2008 financial crisis, the country rolled out numerous policy supports to the property market, which had previously gone into a lull, to bolster the economy. That resulted in price spikes, which were not curbed until the government implemented purchase bans last year.

Now that the Chinese economy faces a deeper risk of a slowdown, stemming from a deepening European crisis and China’s tightening policies, voices pressing for a loosening of the government's grip on the property industry to cushion an economic slowdown are gaining ground. But if the Chinese government does so, it risks a huge loss of its credibility.

The government has pledged for years to curb property prices. But from time to time, it shores up the property industry for the sake of gaining more tax revenues and polishing short-term economic data.

If the government resorts to this trick again, people will definitely lose confidence in its ability to regulate the property market. If tightening policies on the property market are lifted, pent-up demand will fuel home prices to new record highs that will be even more difficult to curb.

 

Full content of EJ Insight is available at www.ejinsight.com. Copyright Hong Kong Economic Journal Ltd. Republishing and editing are forbidden without authorization from Hong Kong Economic Journal. If there are any questions, please contact Chris Yeung (chrisyeung@hkej.com) for editorial matters and Margaret Lor (margaretlor@hkej.com) for sales and marketing matters.

Content provided by Hong Kong Economic Journal - EJ Insight
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