China is back in property-cooling mode. Having succeeded too well in reversing a slump that they sought to engineer, authorities have decided the revival has gone too far. They have a tough job on their hands.
Shanghai is considering increasing down payments for some first-time home buyers to 50 percent from 30 percent and boosting the ratio for second-home loans to 70 percent, people familiar with the matter told Bloomberg News. Beijing and Tianjin are also contemplating fresh measures to rein in prices.
The concern is understandable. Real estate markets in the biggest cities have gone far beyond stabilizing and are back in a full-throttle frenzy. Shanghai's average new home prices jumped 27 percent in July from a year earlier, Beijing's increased 21 percent and in Shenzhen, they surged 41 percent (having peaked at 62 percent in April), according to the National Bureau of Statistics.
Such gains are clearly unsustainable. The longer they continue, the greater the chance of a bust that would hurt banks, undermine economic growth and stoke social instability. Hence the switch by local officials to start leaning against the wind, dating back to March at least in the case of Shanghai.
It was ever thus. Since Chinese housing was first privatized in the late 1990s, real estate in major cities has seen periodic waves of administrative measures aimed at tamping down demand, accompanied by warnings of the dangers of overheated markets. Sales and prices may stumble in the near term, but the normal service of a rising market is usually resumed before long.
The exception was the most recent cooling campaign, which China started to unwind in November 2014. This resulted in widespread price declines, though coincided with a period of weakening economic growth and followed a series of interest-rate increases in 2010-11.
The fact is that administrative measures have only limited impact when monetary policy is pulling in the opposite direction. China's property curbs were partly aimed at weaning the economy off its dependence on real estate investment. Faced with a collapse in growth, the government blinked. Interest-rates were cut five times in 2014 and 2015 and credit growth has roared back, turbo-charging the housing recovery.
This is the wider context in which the latest batch of cooling efforts is happening. Speculators in Shanghai and Beijing are probably already shrugging their shoulders and preparing for business as usual. While sales and prices have weakened somewhat since midyear, the boom is still very much intact.
Add to this that property cycles are slower and longer-lived than those of stock markets, which can change direction on a pin. After China cut the benchmark rate, lowered down-payment ratios and reduced sales taxes in 2014, the value of residential transactions continued to weaken, going from growth of 60 percent to a decline of 20 percent, Bloomberg Intelligence analyst Patrick Wong notes.
What would signal a genuine determination to curtail the property frenzy would be an interest-rate increase. Don't lose sleep waiting for that. Economic growth still trumps everything.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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