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Archive
Cover Stories Series 2012> Controlling Housing Prices> Archive
UPDATED: July 20, 2012 NO. 29 JULY 19, 2012
The Housing Dilemma
Major players in China's property market are determining which direction the market will take
By Liu Xinlian
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This February, Wuhu in central China's Anhui Province said home purchasers would receive subsidies if their newly bought homes were less than 90 square meters in floor space, an obvious break from the state's tightening policies.

"Wuhu's policy hints at the urgent need of local governments to support the property market and the economy," said Johnson Hu, an analyst at CIMB Securities.

Under the policy, buyers would also be exempt from paying the deed tax for home purchases.

In October 2011, Foshan, a third-tier city in Guangdong Province, became the nation's first city to ease restrictions in buying additional residence.

The monetary policy to keep the economy afloat has also put upward pressure on the housing market.

The People's Bank of China announced on July 5 that it would cut the benchmark interest rate for one-year deposits by 25 basis points and that of one-year lending by 31 basis points.

It was the central bank's second interest rate cut in two months, apparently designed to stimulate borrowing as the world's second-largest economy is expected to slow further in the second quarter of 2012.

However, the cut will also bring down the cost of buying homes and, more importantly, boost confidence in the property market.

After two interest rate cuts, buyers who have a 30-year mortgage of 1 million yuan ($158,730) can save 333 yuan ($53) per month.

The loosening monetary policy that encourages first-time buyers to purchase and more people to move into bigger homes will help boost the market, said Li Pingke, an analyst with Guotai Junan Securities.

Enduring mechanism

Currently, with mixed information, the market has changed expectations for future pricing, and residents fear prices will rebound, Wen acknowledged.

Local authorities' moves to loosen housing regulation must be corrected in a timely fashion. Those who cheat to escape from the restrictive purchasing policy should be punished, said Wen.

Wen also urged relevant authorities to accelerate the construction of affordable housing and make it sustainable.

Local authorities should push through land approval for affordable housing and invite investors to participate to ensure construction progress and quality, Wen said.

According to Xinhua News Agency, it is the fifth time that Wen talked about the housing market openly this year.

The Ministry of Housing and Urban-Rural Development reiterated on June 6 that the country would continue with its property market regulation policies, which have so far included higher down-payments, property tax trials and the construction of low-income housing.

The country's central bank and the China Banking Regulatory Commission both clarified on June 14 that they had made no changes on home lending policies and risk weighing for individual mortgage loans.

Even though the government has vowed not to relax property controls, many still doubt that the warming will develop into a complete rebound.

The cash-strained developers will shrink their investment, which will cause insufficient supply, said Qiao Hong, chief economist for Morgan Stanley (Greater China).

"If the housing supply goes further down, the housing price may surge in the future," said Qiao.

The Central Government's position is not likely to change in the short term, but there will be space for local governments to gradually ease policies," she added.

Regarding the recent housing price pickup, Li Chen, an analyst with 5i5j, said that good news of interest rate cuts and developers cutting prices, were attributable.

According to Guo Tianyong, Director of the Research Center of China's Banking Industry at the Central University of Finance and Economics, the state's macro-control policy on the properties industry is deepening, thus house price is more likely to decrease.

The current rebound in the home market mainly relies on first-time buyers, which will weaken as time goes by. Sales may drop in the latter half of the third quarter, said Hu.

Despite the fact that tightening policies have been effective in curbing housing speculation so far, experts still called for long-acting policies.

"In the long term, housing price and demand could not be effectively controlled by administrative intervention, such as house purchasing limit. Otherwise, bubbles will reappear once the limit is lifted," said Jia Kang, Director of the Fiscal Science Research Center of the Ministry of Finance.

If property taxes are levied on real estate owners, it can lead to rational behaviors from both housing supply and demand by posing a tax constraint, Jia said.

The property tax will objectively increase the costs to high-income people who have bought several houses or even luxury houses.

The tax, currently in operation in Shanghai and Chongqing, is considered a heavy tool to curb soaring housing prices.

The government will sum up the experiences from the trials in Shanghai and Chongqing and map out an expansion plan, Jia said.

Email us at: liuxinlian@bjreview.com

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