The arc of rising property prices is flattening if not inverting in response to the measures introduced last year to cool the market by controlling credit. Home prices in China’s 70 largest cities rose 6.4% in December year-on-year, the National Bureau of Statistics says. That was the eighth consecutive month of slowing year-on-year growth rates since April’s 12.8% peak.
December’s month-on-month rise was 0.3%. The continuing growth suggests buyers are racing to beat new residential property taxes. Chongqing is due to start a pilot scheme shortly and Shanghai has just confirmed it will follow suit.
The new taxes are unlikely to have much short term impact. Cutting off credit for new development will continue to be the policy priority. Real estate investment rose by a third in 2010 to 4.8 trillion yuan ($730 billion). Beijing will want to see that number come down in 2011 and the mix of spending favoring affordable housing in inland areas over high-end properties towards the coasts.
Chongqing looks set to become the guinea pig for the introduction of the much discussed and highly controversial residential property tax. Xinhua reports that such a tax on high-end residential real estate has got the nod from the finance ministry and the mayor of the southwestern city. It us up now to the municipal legislature to approve it, usually a rubber-stamp exercise.
Xinhua says the tax could start being levied as soon as March. Then it will be a case of seeing how well it cools real-estate speculation, if at all. Other reports have suggested it will start at 1% and apply to new home purchases only. If so that would get it off to a typically unruffling start.
The big four banks hit their ceilings on new property loans for the year by the end of October and are making no more until 2011, according to state-run China Real Estate Business. This will mainly affect small and medium-sized property developers; large property firms’ borrowing, including that by state-owned developers, is weighted heavily towards the early months of the year. Real estate investment reached 3.8 trillion yuan ($572 billion) in the first 10 months of this year, up 36.5% over the same period a year earlier, according to the national statistics bureau.
We expect the central bank to cut the quota for property-development loans for 2011 as it continues to deflate the real estate bubble, while keeping overall loan limits little changed. The new-loan target for banks for this year is 7.5 trillion yuan, a sharp cut from from 2009’s stimulus-fattened 9.6 trillion yuan of new lending. So far, 6.9 trillion yuan had been committed by the end of October, according to official data.
Last month saw a larger than expected increase in new lending that, if sustained, would bring 2010’s total lending in at an above-target 8 trillion yuan. With policymakers increasingly concerned about inflation and the levels of liquidity in the economy, any money that can be drained off is being so.
Update: Xinhua reports that the big four state-owned banks, the Industrial and Commercial Bank of China, China Construction Bank, Bank of China, and the Agricultural Bank of China, say they have not suspended real-estate lending for the rest of the year, though details remain sketchy. This Bystander smells a non-denial denial. We hear that the big four are being highly selective about developments they will consider lending to, and aren’t necessarily moving at any speed even for those. So while the banks haven’t suspended new lending against real-estate development, they are just not making any loans.
China’s latest stress tests for its banks include a simulation in which property prices fall by almost two-thirds in the most overblown markets, according to a Bloomberg report. Previous stress tests had no more than a one-third drop in property prices as a worst case.
The latest tests, apparently ordered last month, suggest regulators are increasingly concerned about the property bubble bursting, leaving banks with huge bad loans on their books in the wake of last year’s record $1.4 trillion of new loans. Authorities have been reining in new property lending since April. This has halted the growth in property prices but in the 70 cities monitored prices were still up 11.4% in June over the same month of 2009.
The fear is that a 60% stress test implies the banking regulators expect that sort of fall in some cities. That would not be an unreasonable assumption given that prices in cities like Beijing and Shanghai have doubled in this bubble. (Our abacus reminds us that a 60% fall in a price means it had to rise 150% in the first place to end up where it started). In which case, a second bail-out of the big banks’ balance sheets can’t be far behind, though heaven knows what can be done about the shadow banking system. Not much that is too big to fail there, though in the aggregate it will be a mess.
The latest measures announced to cool the property market will effect mainly a handful of cities in eastern China where real estate bubbles are most rampant. Anyone buying a second home now needs to put up a 50% deposit, up from 40%, while the mortgage rate for second homes has also been increased. The minimum down payment for first homes bigger than 90 square meters has been set at 30%. Banks are also being guided not to make loans for third homes and to require a year’s local residence for any home loan. They have already been told not to make loans for property speculation.
The constant flow of regulatory measures to starve property speculators of credit is having some effect, if more slowly than the authorities would like. New bank lending totaled 510.7 billion yuan ($75 billion) in March, down from 700.1 billion yuan in February. But that still leaves total new loans for the first quarter at 2.6 trillion yuan, above the government’s target of 2.25 trillion yuan, and 30% of the 7.5 trillion yuan target for the year as a whole. That suggests more measures will be forthcoming as the government seeks to avoid a generalized increase in interest rates while it believes the resurgence of growth is still fragile and stimulus-spending fueled.
Update: The Housing ministry has piled on, too. It announced Monday tighter regulations on property sales by developers, banning payment before project completion unless approved and stopping developers from delaying sales in the hope of cashing in on a rising market.