When it comes to asking what the China risk is, there’s a distinct air of ‘whose line is it anyway?’ regarding the cause of the country’s property bubble.
Is it more the fault of households buying second (third, etc.) homes?
Or is it developers? State-owned enterprises? Local governments?
Worth asking those questions again, we think, after the State Council’s latest combination of measures to control prices. Deutsche Bank picked out a selection of ’em on Thursday:
Of the eight measures announced today, we think the following few will have a meaningful negative impact on property demand and prices: 1) Increase the minimum downpayment ratio to 60% for second homes, up from the previous 50%. 2) Ban the purchase of second homes in all major cities, including the four municipalities directly administered by the State Council, 5 cities with independent planning status (Dalian, Ningbo, Qingdao, Shenzhen, Xiamen), and all provincial capital cities. This means that at least 40 cities (Tier-1 and 2) will be subject to this restriction, up from about 20 cities that have announced this ban recently. We expect the central government to require other smaller cities that experience significant property price inflation to adopt the same policy soon. 3) Strictly implement the 5.5% business tax on the sales proceeds of properties if held for less than 5 years. Previously, some localities implemented a less aggressive version that allowed a reduced business tax on smaller units (e.g, for properties below 140sqm or costing less RMB2.5mn in Shanghai). 4) Require each local government to set and announce a specific price target in Q1 for newly built properties in 2011.
This is the third set of measures. Prices have kept on rising through the last two. So you can see why it would be nice to have a firm answer on causes.
To recap – household demand might be important, considering that the Chinese are big savers, but they face negative interest rates. Hence, the rush towards property. On the other hand, households might be buying now precisely because prices were already going higher and threatening to lock them out of the market altogether. More of piling on than a cause.
On the other side of the aisle: evidence of collusion between developers and local governments on over-bidding prices; strong tax incentives for local governments to collude in this way; and not to forget, the power of localities to ride roughshod over existing land rights, as Caixin recently reported. And oh yes, the SIVs. So many SIVs.
As you can tell, we’re cleaving to the latter argument at the moment. Which is a shame, given how the current cash crunch will eventually percolate through to property developers, big time.
One last oddity. It’s true that Shanghai and Chongqing both rolled out property taxes on Thursday. Shanghai is targeting newly-bought homes; Chongqing is focusing on houses that have prices more than double the average. Clearly the message is that home-owners are causing prices to explode.
Although, they’re local governments. And to quote Mandy Rice-Davies:
…they would say that, wouldn’t they?