Photographer: Tomohiro Ohsumi/Bloomberg

Why China's Efforts to Cool Its Property Market Won't Work

Standard Chartered suggests property taxes instead.

For Beijing's policy makers, taming the country's ever-growing property sector presents a challenge.

While problems with China's overheating housing sector are nothing new, the fact that real-estate prices are climbing so fast when wider economic growth is slowing raises a big red flag.

In a country where stock markets are underdeveloped and capital is tightly controlled, abundant liquidity injected by previous monetary stimulus has flowed into alternative assets including bonds, commodities, and the housing market. Weak investment appetite due to a slowdown in the real economy has accelerated cash flows into the real-estate market, explain China-watchers.

This poses a serious policy conundrum for Beijing. Considering that the real-estate sector makes up about a quarter of the country's GDP, a property meltdown could be disastrous for the world's second-largest economy. The high stakes have prompted the government to introduce new cooling measures to more than 20 cities, mostly top tier cities where property prices have disproportionately rallied in recent months.

The measures are aimed at discouraging demand in those cities by, for example, raising minimum down-payments and restricting non-residential home purchases.

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But analysts at Standard Chartered Plc reckon these steps aren't enough and risk creating unintended side-effects.

"We expect such measures to cap property prices to some extent but to have a limited impact on housing investment," analysts Betty Rui Wang and Shuang Ding said in a report. "Fixed asset investment (FAI) in the property market has picked up since early this year, but is still below its historical double-digit growth rate. Lack of land supply in top-tier cities and still-high inventory in lower-tier cities are the main reasons for this, in our view."

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While daily transactions and property prices have already dropped sharply in some of those cities, the analysts added that the new regulations could potentially jack up housing prices in unaffected cities. 

As a broad-based, nationwide monetary tightening measure is unlikely to take place when the People's Bank of China maintains a neutral policy stance, the analysts suggest a property tax would be a more efficient measure to ease overheating.

"We believe levying a property tax could be a long-term solution to curbing the sharp volatility in prices and speculation activity in the property market," they said.

Such a move could also benefit local governments, whose coffers would benefit from the levy of a recurrent property tax.

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Such a tax "would provide a solid revenue source for local governments and better align local governments' revenue with their spending and facilitate urban development," the analysts added.

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