Tar­geted poli­cies will stop prop­erty mar­ket over­heat­ing

China Daily (Canada) - - VIEW -

The re­cent up­cy­cles in the main­land’s hous­ing mar­ket has been dif­fer­ent from pre­vi­ous ones, prop­erty prices have risen rapidly in only a small group of cities fol­low­ing the eas­ing of the re­stric­tions on mort­gages. Just 22 cities out of top 70 cities reg­is­tered price rises of more than 5 per­cent year-on-year, which was sub­stan­tially fewer than in past mar­ket up­turns. In Novem­ber 2013, 67 out of top 70 cities en­joyed price in­creases of more than 5 per­cent year-on-year, and 59 cities did so in April 2010.

How­ever, even though house prices have risen dra­mat­i­cally in only a rel­a­tively small num­ber of cities after the pol­icy eas­ing, the price in­creases have been higher than in the pre­vi­ous up­turns. The tier-one cities have reg­is­tered price in­creases of up to 38 per­cent year-on-year and in se­lect tier-two cities prices have risen by up to 45 per­cent year-on-year. The price in­creases in pre­vi­ous up­cy­cles were in the range of 10-20 per­cent year-on-year. The fact that just a small group of cities have ex­pe­ri­enced high rises in house prices this time, ex­plains why th­ese lo­cal gov­ern­ments are un­der pres­sure to tighten their poli­cies.

Since the reg­u­la­tions are tar­geted to curb the in­vest­ment de­mand in th­ese par­tic­u­lar cities, we ex­pect they will be ef­fec­tive in cool­ing the sen­ti­ment in th­ese mar­kets and slow the pace of price rises in th­ese cities. The poli­cies dif­fer among dif­fer­ent cities. But gen­er­ally, the poli­cies in­volve re­stric­tions that limit the num­ber of units a house­hold can pur­chase and raise the down pay­ment re­quire­ments for first home­buy­ers and those up­grad­ing. Since th­ese poli­cies tar­get only de­mand in cities that have ex­pe­ri­enced high price in­creases, they are not blan­ket poli­cies and so might squeeze some buy­ing de­mand to other lower tier cities lo­cated in the vicin­ity. Given that the tar­geted cities have rel­a­tively lower in­ven­tory lev­els, it is un­likely to trig­ger a sig­nif­i­cant price cor­rec­tion. How­ever, it should trig­ger a slow­down in prop­erty sales vol­umes in the com­ing months.

The higher hous­ing lever­age over the past 12 to 15 months has been driven by the low­er­ing of min­i­mum down pay­ment re­quire­ments and the loos­en­ing of over­all mon­e­tary liq­uid­ity. How­ever, the ac­cu­mu­lated mort­gage loans as a per­cent­age of GDP re­main at low lev­els when com­pared to the other de­vel­oped coun­tries. We con­sider hous­ing lever­age has not reached a risky level. In fact, the govern­ment’s prompt re­sponse to the fast buildup of house­hold lever­age should help pro­tect the mar­ket from run­ning into a risky con­di­tion.

We ex­pect the growth of new starts, the mo­men­tum of price in­creases and growth of hous­ing de­mand to slow in 2017. GDP growth in 2016 has been re­ly­ing on the growth of new con­struc­tion starts, how­ever, new con­struc­tion starts will prob­a­bly no longer be a key driver next year.

The tight­en­ing mea­sures are ex­pected to slow the growth of new starts, par­tic­u­larly in tiertwo cities. Our anal­y­sis in­di­cates that the up­trend of prop­erty prices and faster growth of home sales have been the key fac­tors driv­ing the re­cov­ery of new starts over the past up­cy­cles. The growth of new starts in tiertwo cities has reg­is­tered the sharpest growth year-to-date, which has been sup­port­ing new starts na­tion­wide. With the slow­ing growth of sales and price growth in most tier-two cities, it will en­cour­age de­vel­op­ers to ac­cel­er­ate their con­trac­tion plans in the com­ing six to 12 months. In ad­di­tion, land prices are in­creas­ing faster than prop­erty prices, which will also dis­cour­age de­vel­op­ers from speed­ing-up their con­struc­tion in a chal­leng­ing mar­ket.

To con­clude, we con­sider this round of tight­en­ing mea­sures should be ef­fec­tive in slow­ing the fast pace of prop­erty price in­creases and help lower sales vol­umes in the cities that have im­ple­mented new poli­cies. We con­sider the cur­rent house­hold lever­age as a per­cent­age of GDP hasn’t reached a risky level. The tight­en­ing poli­cies will in­evitably weaken de­vel­op­ers’ in­vest­ment sen­ti­ment and slow their con­struc­tion starts. Hence, it will af­fect the growth of new starts next year and they will be un­likely to be a key growth driver of GDP next year.

The au­thor is head of China Prop­erty Re­search, UBS In­vest­ment Bank.

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