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HONG KONG/BEIJING: China is determined to curb sharp rises in property prices to prevent asset bubbles, deploying a combination of credit tightening measures, increasing supply of affordable housing and verbal suasion.
This week, China raised its reserve requirement ratio by 0.5 percentage point to absorb excessive liquidity, at a time when China's property prices are rising strongly.
In December, urban property prices rose by an annual 7.8%, marking the fastest pace of 2009.
Following are some possible measures the Chinese government might take to rein in the surge in property prices:
RAISE MORTGAGE RATES TO CURB LENDING
More likely.
Since about a sixth of China's nearly 10 trillion yuan (RM5 trillion) in new loans last year went to the property sector, analysts said the most direct way to clamp down speculation was to control mortgage lending and loans to developers.
In October 2008, the central bank cut the minimum mortgage rate to 70% of its benchmark lending rates, with analysts saying that the authority might raise those rates to around 85% as part of efforts to clamp down on speculation.
"Right now, mortgage interest rate is 30% below policy rate. That subsidy needs to be removed," Andy Xie, an independent economist who has warned of a property bubble bursting in China, told Reuters Insider.
Apart from major property lenders, such as China Construction Bank, and Industrial and Commercial Bank of China, developers with high gearing ratio, such as Shanghai Forte Land Co Ltd might be hit hard, analysts said.
The negative impact on major developers with sufficient cash, such as China Vanke, will likely be muted, analysts said.
Some analysts also expect the government to raise the requirement ratio again in coming months to help prevent the world's third-largest economy from overheating, in addition to
implementing property-related measures.
State media said the government had told banks to stop giving commissions to property agents for mortgage customers they introduce.
LIFTING DOWNPAYMENTS OF SECOND HOMES FROM 40%
Likely.
Another possibility is raising the downpayment of buyers of second or third homes to a minimum of 50% from 40% now.
This will most probably stifle some demand, but not by too much, so the negative impact on property developers will be muted, analysts said.
"Any measures they take will be gradual as the government doesn't want to hamper demand in the market," said a property analyst, who declined to be identified.
So far, the China Banking Regulatory Commission has denied media reports that it would make such a move in the near term.
But Beijing has recently tweaked its measures to make it very clear that it means a second home for the whole family.
Previously, it was ambiguous on that point and some banks were counting a second home as one for any grown-up member in the family.
China has also left it unchanged for the first-home buyers to enjoy a minimum 20% downpayment.
INTRODUCING A PROPERTY TAX
Least likely.
For years, the government has been saying that it is considering introducing a new property tax, but that has not materialised as some technical problems remain unresolved,
including the registration of residential properties.
"It will be very risky to do it this year," David Ng, head of regional research from RBS said. "It's better to launch that in a normal environment."
Implementing such a tax will also hit the market hard, which officials would want to avoid given that the sector is a key pillar of the economy.
However, analysts said Chinese officials might raise the issue time and again as a signal to the market that it was looking into all kinds of measures to prevent the sector from overheating. -- Reuters
