Cooled property market testing govt regulation

Declining enthusiasm for home purchases is testing Chinese local authorities' faith in measures introduced to control the property market as many loosen these curbs in the face of continued downward pressure.

Of all the Chinese cities that instigated measures like higher down payments and second-home restrictions to cool the market in a period when it was red-hot, more than 30, or 60 percent, have undone or loosened them.

With home sales slowing, rising inventories and a drop in property investment by developers have become big headaches for local governments.

Fifty-five of an official sample of 70 Chinese cities saw home prices drop month on month in June, the most in 30 months. Even home prices in first-tier cities such as Shanghai and Guangzhou have not held up.

The loosening comes in various forms. Some cities have openly removed previous curbs, others have kept them but provided compensatory incentives such as tax breaks for buyers.

Hangzhou, the provincial capital of East China's Zhejiang province, has removed restrictions on home purchases in the city's suburbs and those in downtown areas if the floor area exceeds 140 square meters. Such targeted easing measures are also in place in other second-tier cities.

Some have made the move without actually promoting it. Property developers have received verbal go-ahead from local authorities to sell homes to buyers who would previously have been locked out.

The government of Changzhou in Zhejiang province even took to printing a front-page article in its mouthpiece local newspaper titled "Now is the best time to buy a home in the city." The article harried readers over the fact that sales traditionally surge in September and October.

The question, it seems, is not whether more cities will loosen property curbs, but how far they will go in doing so.

During a forum in Shanghai over the weekend, Goldman Sachs economist Ha Jiming said such loosening provides, at best, temporary relief for the property sector and expressed doubt that it could reverse the trend.

"Such curbs have proved ineffective in reining in property prices and removing them won't necessarily shore up prices either, " Ha said. "In overall terms, home supply has exceeded demand and this is particularly so in small cities. There is an inconsistency between policy guidance and the market dynamics."

Why the loosening?

Analysts say local governments have appeared to be more motivated than developers to reverse the cooling trend.

Local governments gross a big chunk of their revenue by selling land to developers, so they are understandably inclined to step in and help developers unload existing properties.

According to the Ministry of Finance, the value of land sales quadrupled from 2008 to 4.12 trillion yuan last year. In comparison, fiscal revenues merely doubled during the period, reaching 12.9 trillion in 2013.

A report from the Development Research Center under the State Council, China's cabinet, showed that land sales account for 60 percent of local government's extra-budgetary revenues.

Frank Chen, executive director at property research firm CBRE, said the fact that many governments have reversed the property curbs shows that they have grown too reliant on land sales for revenue. Chinese economic growth has already ticked down, and if the property market remains sluggish, it will take a heavy toll on the coffers of local governments.

They went on a building spree after the central government doled out cheap credit to keep the Chinese economy afloat in the wake of the global financial crisis. Many cities that managed to shore up their local economy through the real estate boom are now brooding over rows of empty apartments.

Will this work?

Loosening might not bring the hoped-for immediate impact, but it will surely prevent the property bubble from growing bigger as prospective buyers remain on the sidelines, according to Zhu Zhongyi, vice-president of the China Real Estate Industry Association.

Analysts said that at the heart of this round of policy loosening is fine tuning and targeted easing. Across-the-board scrapping of property curbs was never likely, and the pattern derived from measures already taken is that existing curbs can be loosened when property prices drop to a point that causes material damage to local economies.

Another factor contributing to slow home sales, many analysts suggest, is banks' growing reluctance to extend mortgages to home buyers.

China's major banks have scaled back mortgages since late last year, as the rising cost of deposits and discounts in mortgage rates combined to hurt their margins.

The trend has not gone unnoticed by regulators. During a closed-door meeting in May, Liu Shiyu, the vice-governor of China's central bank, urged banks to expedite mortgage approvals for qualified home buyers.

Yet in what appears to be quiet disobedience to this guidance, there has been no marked increase in mortgage approvals in the months after the meeting and banks are no longer offering discounted mortgage rates.

"Don't expect the ongoing policy tweaks by local authorities in some regions to grow into a full-blown reversal of property curbs across the country," said Qin Hong, director of the policy research center under the Ministry of Housing and Urban-Rural Development.

Qin said that scrapping existing curbs altogether goes against efforts to squeeze out speculation in the property market -- a key component of the government's policy agenda.

The bottom line, she said, is that such policy tweaking must not be abused by local governments as a way to stimulate the property market to ensure short-term economic growth. Any changes made should be designed to bring the country's property sector on a healthier course of development.

"Loosening curbs is not a game-changer in the proper market," said Andy Ma, a CBRE managing director based in Hangzhou. The market fundamentals will remain the same unless land supply problems and the over-reliance on land sales for fiscal revenue are properly addressed, he believes.