Property under attack in China
While U.S. President Barack Obama hopes to see a quick property market recovery to boost investor confidence, China’s intentions for its own property market are the diametric opposite – not because it wants to damage investor confidence, but rather to cool growing social unrest prompted by fast-rising property prices.
On Jan. 26, Chinese Premier Wen Jiabao hosted a cabinet meeting to discuss the latest property market situation. As a result of the top-level meeting, Wen announced his new "eight-point" guidelines, considered by many analysts as the toughest so far and probably his last major effort to curb property prices:
1. Local governments should set 2011 property price-control targets and make them public
2. Land supply for affordable public housing should be stepped up and the pace of construction increased
3. Properties sold within five years of purchase will be subject to a sales tax based on the selling price
4. The minimum down payment requirement on second homes will rise to 60 percent from 50 percent
5. Land supply for residential property this year should be no less than the average annual figure from the previous two years
6. Home-purchase limits will be adopted nationwide. Local governments should limit home purchases by non-local residents and those who have already purchased more than two homes.
7. Local government should take responsibility for stabilising property prices (in other words, those who fail to do their job could be punished)
8. Increased education to encourage more sensible property investment to create a more stable market for the long term
Wen, whose nickname is “Grandpa Wen” for his usually warm public personality, has pledged to rein in property prices before the end of his final term in office in 2012. But time is short and progress has so far been limited, so he has decided to take action once again.
Among the eight points, the most important is of course to raise the down payment minimum for second-home buyers. Local media have already reported a sharp rebound in property transactions, one or even two times more than usual since the beginning of the year in some big cities such as Shanghai and Beijing. With the anticipation of more policy curbs, Chinese home buyers feel compelled to sign deals more quickly and more aggressively.
Early this week, official think-tank the China Academy of Sciences released its 2011 forecasts, including an estimate that property price growth may slow but will still rise about 12 percent on average. Such forecasts should serve as clear cautions to Premier Wen if he wants to keep his promise before he retires.
Ironically, property prices have risen more than ever before since Wen took power. Of course, you can't blame him. All this, I say, is a natural process and the result of strong economic growth and increasing personal wealth.
But just like a coin, everything has two sides. Those who get rich (as late Chinese leader Deng Xiaoping said "let some people get rich first") are happy to get their homes. Those who miss the chance ... oops ... perhaps Premier Wen can do more to get them on track.
For global fund managers, who are still talking about the beautiful China story: Wake up, please, because 2011 looks like a truly strange and difficult year for China, if not for the whole world. Chinese banks are under pressure, thanks to endless reserve ratio increases. Property is now under attack. Commodities prices continue to rise in global markets and most people say it’s too complicated to understand how commodities and futures products work. So, tell me which is relatively speaking the safest area to put money?
Perhaps property if you are a firm believer in yuan appreciation, which could be even faster this year for the sake of Sino-U.S. relations? I do believe President Hu Jintao doesn’t mean to disappoint President Obama after his successful state visit.
Apparently, Zhang Xin, CEO and co-founder of leading Chinese developer SOHO China, is still a big fan of the business. There is little reason to expect new measures by the Chinese authorities to rein in property prices will be any more effective this year than in 2010, she said. What happened in 2010? It was considered the toughest policy year for real estate in China. And the result? Property price rose more than 20 percent on average.
"So what, you say? Do what I do. The property market is already out of the government's control. It’s too late," a fund manager summed up the recent property policies for me when we had lunch recently. Then he ordered another glass of wine despite complaints about his lower bonus this year, given mediocre fund performance in 2010. My fund manager friend is probably what Deng was talking about -- those who get rich first. He's now looking to buy his third home in Shanghai.