Governments are incapable of fine tuning property markets, warns John Saunders, head of property research at brokerage CLSA. Recent government efforts to dampen the market in Beijing, provincial cities and especially Shanghai will inevitably lead to a much sharper downturn than the government intended, he says.
Shanghai, which has seen the sharpest property rises in the past five years, is likely to go down 30% over the next two years, compared to 20% in Beijing.
"The government sees the property sector as the main culprit for the economic overheating, and it will stop at nothing to knock it back, raising the chance of an over-correction," he estimates.
Saunders draws a parallel with the Hong Kong government, which promised increased affordability to Hong Kong residents in the aftermath of the Asian Financial Crisis. The property market ended up collapsing 80%, which was certainly not the government's intention, says Saunders.
In contrast to China, Hong Kong's property market is booming since the government is stimulating the economy to inflate away the government's budget deficit, he adds.
China's property boom certainly has unhealthy aspects, making a correction more likely.
Even in Beijing an investor does not need to show a tax bill to prove his income. All the buyer needs is a document from a company showing his monthly income and bank statements. The buyer's main task is to come up with the deposit, which was increased to 30% from 20% earlier this year.
In case of default, it is the developer who is liable to the bank, rather than the signatory to the document. It is, therefore, easy for a buyer to get a friend to attest to a much higher income than he is actually getting.
Saunders says the eight point circular issued by the state council in April this year is the culmination of increasingly harsh efforts to quell speculation.
Measures include a 5.5% capital gains tax in Shanghai; requiring the seller to pay off his mortgage before he sells, while simultaneously cutting down on bridging loans; reducing the loan to value of mortgages for multiples property buyers; a ban on mortgages that are resold within one year and a 27 basis points in interest rates earlier this year.
The government has also forced developers to provide more money upfront. Developers must now contribute 35% in equity to new projects.
All these measures originated in Shanghai, but Saunders believes they are being rolled out nation-wide. "Growth will slow across the country," he concludes.
Using the share price of China Overseas Land as a proxy, Saunders showed that the government's measures are finally taking effect. Shanghai Overseas Land's share price has tumbled from over HK$2 in the early part of this year to just over HK$1.50 currently. That compares to a share price of HK$0.75 in mid 2003.
Saunders points out that in the year before February 2005 new sales contracts by residential property buyers were down 14% nationally, down 35% in Shanghai, down 5% in Beijing and down 44% in Chongqing.
That compares to new contracts up 89% nationally, 38% in Shanghai and 29% in Beijing over the same time period.
Saunders denies that the slowdown in property is caused by the rising un-affordability of Chinese housing.
"It's misleading to look at per capita GDP in China as a measure of affordability. It's more relevant to look at household incomes, given that extended families live together," he notes, adding that this substantially improves affordability.
Shanghai's per capita annual GDP is around $5000, compared to around $30,000 in New York and London.
Saunders estimates that Hong Kong property is on average priced at $480 per square foot compared to $375 in Shanghai, $950 in New York and $1300 in London.
Property prices in Shanghai are higher than in the capital. This is despite the fact that even the most luxurious Shanghai flats lacking the central heating that comes as standard in Beijing.
Beijing property rose sharply last year as investors banked on a catch up play with Shanghai. But Beijing's slow-moving bureaucracy has ensured the bubble is less extreme than in Shanghai.
While it is mandatory for the Shanghai land bureau to prepare a deed within three months, it can take up to three years in Beijing. Without the deed, it is not possible, or at any rate far more risky, to flip the property.
Despite their headline grabbing, Shanghai and Beijing are not the most expensive cities in China. That privilege falls to Shenzhen. According to CLSA, as far back as 1993, average Shenzhen property prices were Rmb 9000 per square meter. At that time Shanghai property was priced at Rmb 3000 per square meter and Beijing slightly higher.
Due to its proximity to Hong Kong, Shenzhen is still the most expensive city in China.
