Tuesday, April 20, 2010

China acts further to dampen property prices

Banks told to stop loans for third-home buys, get tax returns from buyers

China told banks to stop loans for third-home purchases as the government steps up measures to cool property prices with some of the ‘most draconian’ orders yet.

Banks should also suspend lending to buyers who can’t provide tax returns or proof of social security contributions, the State Council said in a April 17 statement. The latest measures come on top of orders to banks this year to set aside more deposits as reserves and raise mortgage rates, and steps to re-impose a sales tax on homes.

‘These are the most draconian measures on the property market in history,’ Jun Ma, Deutsche Bank AG’s Greater China chief economist, said in a note to clients yesterday. Chinese press reports point to ‘panic selling’ by investors who own more than one home in Shanghai, Beijing and Shenzhen, he said.

China is taking steps to cool its property market as investors including hedge fund manager James Chanos warn of a bubble after prices surged in the world’s third-biggest economy. The latest data shows prices gained a record 11.7 per cent in March, suggesting more severe policies are needed.

Local governments can limit the number of units that can be bought, while senior officials will be held responsible for failing to stabilise property prices, the State Council’s statement said.

The nation’s commercial banks have halted extending revolving loans after regulators began investigating the flow of funds into the stock market, the Securities Times reported last Friday.

China’s property stocks face ‘high policy risk’, Goldman Sachs Group Inc analysts led by Yi Wang wrote in a report. The new mortgage policy ‘if strictly implemented, could effectively curb speculation in select cities and could thus affect the near-term volume and price outlook in those cities’.

The new instructions may lead average home prices to fall as much as 10 per cent in the major Chinese cities, while values of mid- and high-end properties may drop 20 per cent, Deutsche Bank’s Mr Ma said. Monthly transaction volumes could decline by more than 50 per cent in the coming months, he added.

The latest measures are ‘reasonable’ in helping to curb speculation in parts of the housing market, said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors, which oversees US$90 billion. ‘Relying solely on monetary policy to cool the housing market could cause wider collateral damage to the broader economy which isn’t necessary.’

Following the data, China raised mortgage rates and downpayment ratios for second-home purchases last week.

Investors should ‘avoid the property, banking, steel and construction material industries’, Morgan Stanley Asia Ltd’s analysts Jerry Lou and Allen Gui wrote in a research note dated yesterday. ‘The harsh tone in Saturday’s statement suggests that containing property price is now the top item on Beijing’s agenda.’

The government may introduce more measures to cool the property market, including taxes. China may soon start trials of a tax on property transactions, the China Times reported, citing an unidentified person close to the Ministry of Finance.

Source: Business Times, 20 Apr 2010

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