More measures to cool China's property market in the works

Beijing will announce more tightening measures to cool the nation's property market even at the cost of growing non-performing loans, unfinished construction projects, or worse, corporate failure, observers say, noting that the government has dropped its concern about the economic recovery not being "consolidated" and is ready to curb the overheated economy.

Most urgently, economists say, Chinese policymakers have to prove themselves with regard to macro regulation because their credibility is at stake. "The government has to make sure that the property market is under control this time, otherwise the effectiveness of China's macro regulation will be questioned," Qu Hongbin, co-head of Asian economic research and chief China economist at HSBC, said last week.

"More tightening policies may lead to bad loans and unfinished projects, but it's better to solve problems when they are small," he told reporters at a press briefing.

Qu thinks the government is likely to levy a property tax in order to greatly increase the costs of owning several different properties in the country. "I think they are discussing possible tax policies now," he said.

In the past two weeks, Beijing has introduced a series of measures that observers describe as the most severe property regulations ever.

On April 14 the government said the minimum down payment required on the purchase of second homes would be increased to 50% from 40%, and loans to buyers in this segment of the market would be charged at double the People's Bank of China benchmark interest rate. The bar will also be raised for first-time buyers, with down payments increasing to 30% from 20% if the apartment is larger than 90 square metres.

The following weekend, the government banned mortgages for people buying their third property, and imposed residency requirements on buyers.

Tightening policies will continue until the government genuinely believes that the property market is under control, which could be a few months ahead. They could lead to some high-profile arrests or corporate failure, Credit Suisse published last Thursday.

"The government is taking its ability to cool the property market as a confirmation of its credibility in economic management," Credit Suisse analysts Vincent Chan and Peggy Chan said in the report.

Property prices in 70 major cities rose 11.7% year-on-year in March, according to data from the National Bureau of Statistics. In some bigger cities house prices have risen by 50% since late 2009.

The new measures will reduce transaction volumes in the housing market and property prices may fall as much as 20% in the second half of the year, BNP Paribas said last week.

At the end of 2008, when China's exports and real estate market were hit the hardest by the global economic slowdown, Beijing launched a series of accommodative measures directed at the property market. It lowered down-payment requirements, cut mortgage and interest rates, and reduced taxes on property transactions.

The moves greatly improved affordability and demand and led to a strong recovery in transaction volumes. However, as inventory of unsold homes was reduced, pricing power went straight back to the property developers in the second half of 2009.

The quick response to the global recession by China's cabinet, which introduced a Rmb4 trillion stimulus package in November 2008, has enabled the country to sail through the crisis almost unscathed, and has helped Beijing to win lots of applause from the global community for its achievement in economy management.

China's position was further enhanced last Sunday when it overtook large European nations in a shift in voting power at the World Bank that was designed to give emerging economies greater influence in the global development institution.

The country's red-hot property market has brought the Chinese government into the limelight again. And the world is watching to see how Beijing applies its panacea -- macro regulation -- to keep the property market in check.