3rd April 2013
Fund manager Schroders has set out to explain why the Chinese property market can move so swiftly from fears of a soft landing to worries about overheating in such a short period of time. But it also says China’s property market may be becoming a contrarian indicator “the better it is the more likely we see punitive restrictions to quell growth.
The divergence with the US remains dramatic however. The note says: “Taking into account the industries whose performance is closely related to housing activity (e.g. home furnishings, urban development infrastructure etc.), it is clear that movements in the housing sector are key drivers of the Chinese macroeconomic outlook. Moreover, a significant proportion of local government funding is generated through land sales and real-estate related taxes.”
Schroders says prices in China’s large coastal cities have risen significantly in the last quarter – more than even the usual strong demand for housing would suggest.
Government measures taken to calm things so far have included enforcing capital gains tax of 20 per cent and increased the required down payment on second home mortgages in several cities. The note adds: “If these measures prove insufficient to maintain control of the market, policymakers have scope for further tightening to squeeze speculative activity and cool the housing market. This could take the form extending minimum down payments for second homes to more cities, further increasing the minimum down payment currently 60 per cent or allowing greater flexibility on increasing the lending rate (currently capped at 10 per cent over the benchmark rate of 6 per cent.”
In terms of the knock on effects, the big losers will be property companies, but Schroders says such measures will often feed through the wider economy and could for example eventually feed through to lower demand for base metals hitting countries such as Australia, Chile and Peru.
The note suggests a long term solution to the property market sensitivities will be more savings and investment products and better housing supply. “The solution to the persistent threat of housing bubbles in China, in the long-run, lies in wholesale reforms. Reform of wealth management products and the banking sector, allowing savers to earn better real returns on their capital without the need for property market speculation, would certainly be beneficial. An increased supply of housing, especially in those cities with the most chronic under-supply and with the highest rates of urbanisation, is an even more pressing need. These aims, however, are unachievable in the short-run, leaving property restrictions the only option left for policymakers faced with an overexcited housing market. It will continue to remain the key area to observe for China watchers.”