China’s Housing Market To Face Increasing Policy Risks In 2010

Nov. 13, 2009 - PRLog -- According to the latest report by international property consultant Knight Frank, China’s housing market is likely to face increasing policy risks in 2010. The tightening measure already implemented in Beijing, which is aimed at combating homebuyers’ practice of understating transacted prices to reduce tax payments, may be extended to other cities. Had it not been for poor external demand and a shrinking export sector, China’s central government would have pushed ahead with more drastic tightening measures to curb the rise in residential prices by now.

In late June 2009, after home prices staged a robust rebound, the central government tightened financing for the purchase of second homes, in terms of down payments and mortgage rates. However, by September, secondary home prices in China’s key cities, including Beijing, Shanghai, Guangzhou and Shenzhen, had rebounded to levels surpassing their peaks of the previous upturn by 6–9%. The asking prices of some super luxury units in Shanghai and Beijing recently reached RMB130,000 and RMB90,000 per square metre, respectively.

Xavier Wong, Knight Frank’s Head of Research in Greater China, says the central government is likely to cool the property market with additional measures when the export sector shows more visible signs of recovery, probably some time in 2010. However, certain policies placed on the property sector, which hinge on implementation by local governments and commercial banks, may not be as effective as they intend and this will eventually induce the central government to resort to more drastic measures. For instance, although the central government tightened financing for the purchase of second homes in late June, until recently, some buyers of second homes continued to enjoy the same preferential packages intended for their first homes.

Wong predicts that mortgage rate hikes, coupled with certain administrative measures, will be adopted to curb the rise in home prices in the coming year. It will be interesting to note whether the banking sector will again rush to lend in the first quarter of 2010, in anticipation of potential tightening measures, and how the central government will react if this happens. In the coming year, the authorities may not be as tolerant towards excessive bank lending as in early 2009, when the global economy was in deep crisis.

China’s commercial banks have a tendency to achieve their annual lending target early, before potential tightening measures that could disrupt their lending business are announced by the central government. Between 2004 and 2008, China’s banking sector extended an average of 40% of its annual loans within the first quarter of each year. For 2009, an annual loan target of RMB5,000 billion was set, but the target was fully achieved within the first three months of the year.

In Beijing, apart from tightening the mortgage lending terms for secondary residences, the city’s banking regulator has required commercial banks to extend mortgage loans on whichever is lower: bank valuation or stated transaction price. This policy, which is aimed at combating homebuyers’ practice of understating transacted prices to reduce tax payments, has dampened housing demand. Market watchers will be monitoring to see whether such a policy will be extended to other cities.

Though China’s housing market may face more policy risks in 2010, a major correction in home prices similar to that that occurred in 2007 and 2008 is not expected, as developers are unlikely to significantly lower prices. Residential inventory has been substantially reduced after bumper sales in the first half of this year and over the last few months, developers have successfully raised additional funds from the capital markets or from banks. Also, land prices in many cities have surged due to a lack of supply and an increase in state enterprises entering the real estate industry.

The tendency of Chinese citizens to accumulate substantial savings and their fixation with investing in bricks and mortar may mean that China’s property market up-cycle will last longer than those in the west, though the risk of an investment bubble should not be taken lightly. China’s national savings rate amounted to 52.2% of GDP in 2008 and up to 30% of homebuyers in some cities do not require a mortgage to purchase property. Wong says this may mean that China’s property market bubble is sill in an early stage of formation.

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Knight Frank LLP is the leading independent global property consultancy. Headquartered in London, Knight Frank and its New York-based global partner, Newmark Knight Frank, operate from 207 offices, in 43 countries, across six continents. More than 6,340 professionals handle in excess of US$886 billion worth of commercial, agricultural and residential real estate annually, advising clients ranging from individual owners and buyers to major developers, investors and corporate tenants.

Knight Frank has a strong presence in the Greater China property markets, with offices in Hong Kong, Beijing, Shanghai, Guangzhou and Macau, offering high-quality professional advice and solutions across a comprehensive portfolio of property services. For further information about the Company, please visit www.knightfrank.com.hk.