This article is a guest contribution from Winnie Phua, Matthews Asia.
June 11, 2010
Since the beginning of 2010, Chinese officials have repeatedly warned of rapidly rising housing prices. In the first four months of the year, nationwide property prices grew at an average year-over-year rate of 11.2%. Concerns have centered not only over the appreciation, but also the accelerated pace of the rise. In April 2010 alone, home prices rose 12.8% from a year ago. While nationwide home prices are on a strong upward trend, this situation is perhaps even more pronounced in the luxury segment. High-end apartments in major cities such as Beijing and Shanghai have experienced price increases of 40% to 50%, largely due to investments by wealthy individuals from all across China. In a country in which wealth can be channeled through a limited number of avenues, real estate remains one of the most popular investment options.
With little cooling of the property sector in sight, in April the government stepped in with tougher measures to curb prices. These policies increased down payments and mortgage rates for second-time home buyers, and more stringent measures prohibit loans to buyers of more than two homes. Beijing has enacted a one-year residency requirement for prospective homebuyers, and each household can purchase just one residential unit. The latest new measure involves property taxes. To date, the enforcement and implementation of property taxes varies widely from city to city. This tax will likely come in the form of either a percentage of a home's purchase price or a percentage of annual rental income. Further talks of property tax implementation remain ongoing.
So far, these policies seem to be effective as we are seeing drops of more than 50% in property sales in major Chinese cities. A property agency company I met with recently told me that developers are preparing for a slow market over the next two to three months as prospective home buyers adopt a wait-and-see attitude on purchases. While prices have remained firm so far, company officials said they would not be surprised if developers begin cutting prices after an extended period of lower sales. Further, this property agency firmly believes that underlying property demand has not dissipated, and a 10% to 15% price cut will likely lure back buyers.
Still, many continue to worry about the health of China’s property market—and with good reason. The property market meaningfully contributes to fixed asset investment, which has been a major driver of China’s GDP growth. Many local governments also derive a substantial portion of their fiscal budgets from land sales. Thus, deliberately slowing the property market will result in outcomes that are neither good for the economy nor for consumer sentiment.
What is important to understand in this context, however, is that the government has no intentions of bringing the whole industry to a grinding halt. It is apparent that officials have a specific target in mind, deterring over-speculation in the property markets by the means of de-emphasizing those home purchases not intended for primary use. The government is not worried about creating a mortgage bubble situation similar to what occurred in the U.S. Chinese home buyers typically make down payments of between 30% to 50% of home prices, and complete repayment of mortgages within 10 to 20 years. However, we are witnessing a freezing of the market as property buyers tend to approach these purchases as investments. This dampening of the high-end market has spill-over effects to the price-sensitive mass market segment as consumers wait for opportunities in lower property prices.
A crucial component of investing in China’s property sector is managing exposure to such policy risks. Since these policies have been announced, the sector has corrected severely and developers, on average, are down about 20% so far this year. While no participant in the real estate sector is immune to such impacts, companies differ in their ability to weather such policies based on the geographical diversity of their product offering, and their financial strength and diligence in mitigating excess risk during downturns. Over the long run, however, the prospects for China’s property market appear to remain sound. While home ownership in China is reported to be as high as 80%, a closer look at this number indicates that true ownership, in which property owners have transferable rights, is more like 40%. As such, population and urbanization are long-term dynamics that should continue to facilitate underlying demand for property in China. Asset value appreciation is a long-term trend in a growing country such as China and while property prices may have spiked in the luxury segment of major cities, prices in second- and third-tier cities continue to be reasonably affordable.
Winnie Phua
Research Analyst
Matthews International Capital Management, LLC
Copyright (c) Matthews Asia
