Priming the Engine of China’s Real Estate Market

Tuesday, December 30, 2008 9:05
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In China, real estate, stocks, and savings accounts are pretty much the only way for average citizens to build wealth, and over the last 12-18 months 2 of these (stocks and real estate) have taken a hammering.

Initially, when stocks began coming off and the real estate market was “stabilizing” at ridiculous levels, no one really seemed bothered. In fact, there was a clear belief that these asset classes were already overvalued, and the government had taken a number of steps to slow down these assets and investors in these classes as they feared their overvaluation would lead to a market bust.

However, when the major markets of Shenzhen, Beijing, Shanghai beginning to feel the effects of the global imbalances, the mindset changed. That the rate by which the assets had devalued was hitting consumer confidence, that a poor consumer confidence was a source of instability, and that it was time to do something… fast.

China publishes details of real-estate stimulus package ,Nanjing maps out 5 measures to boost property market, and Favorable loan policies for second-time buyers are all actionable announcements that show that the tipping point has been past and that regardless of what happened the last 18 months, the government feels it needs to act move their consumers from the sideline to the deep end of the pool.

some of the highlights include:

The five-point opinions included building more houses for low-income urban families, encouraging home buying, supporting property developers to deal with changing market, enhancing role of local governments in stabilizing the real estate market, and improving surveillance on the property market. 
Clearly meant to spur investment in the sector while ensuring that the low income sector can be protected (originally the primary concern when assets increased)

someone who has owned his home for two or more years can now sell it without having to pay business taxes. Previously, owners had to wait at least five years before selling houses tax-free. 
– A fantastic way to free up some of the best investment properties while putting more money into the hands of potential consumers

The Nanjing municipal government will reduce property tax from 4% to 3% for the high-end home buyers next year. Besides, the local government will also provide 1% of the total transaction value as subsidy to those purchasers.
– Enticing in buyers with lower set up costs

the government also allows people with “smaller-than-average” apartments to buy a second apartment under favorable loan terms. Size limits are different in every city.
– a legal barrier that proved ineffective in reality, but perhaps now that buying multiple properties is legit, it will encourage the bulk buying that once typified the 2003-2005 spending sprees

the mortgage lending ceiling in the city’s housing fund program will be doubled to 400,000 yuan (US$58,400) for second-time buyers if at least two people cover the repayments. These families will be eligible for a maximum loan of 600,000 yuan if they have an extra funding account.
– Sound familiar to anyone? Subprime….

Where I am still left unconvinced that the above will work though is simply that the investment market for properties really is in poor shape right now.  Something I focused on in Renting Apartments in Shanghai: Why Now is a Good Time for Renters

As discussed in that article, the rental market right now essentially guarantees that landlords will lose money.  Luxury apartment blocks like top of the City, which were expat ghettos that provided nice profits for landlords, are now very difficult to rent out. (One landlord I know was once renting a 2br apartment for 17,000RMB, and has struggled with 12,000RMB for 6 month).

This is the problem that needs to be solved.

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