Many property market analysts foresee harsher restrictions on real estate sales as China's Communist Party prepares for a crucial summit that begins on Saturday. Home prices have been rising faster than the government believes is healthy, and some observers feel they have reached bubble levels. apartments
Property sales have picked up in 2013, and Chinese property stocks are on the rise. However, according to Mizuho Securities analyst Alan Jin, who downgraded the China property development sector to neutral at the end of October, the potential of tighter housing policies has been overestimated.
In a study, he stated, "We believe the government will be forced to take some action to cool off the market."
"This gathering is the first clear opportunity for President Xi Jinping to set out his reform objectives, a topic he claims is critical to his administration."
Mr. Jin believes that rather than introducing sweeping new measures without a comprehensive long-term housing policy, the government will toughen current laws to curb demand.
This means larger housing down payments, greater limitations on financing and mortgage rates for second houses, and delayed mortgage loan approvals. The government is also expected to raise stamp duties and capital gains taxes, as well as expand the conditions for restricting persons from buying multiple properties.
There's also a chance that China would finally implement a broader property tax, which Shanghai and Chongqing, both in central China, have already implemented on a trial basis. Smaller cities will likely be spared to stimulate investment and growth, but if not implemented at the Communist Party congress, a wider property tax for larger cities, mostly on the industrialized east coast, will be examined.
According to reports in the media, China may enact an inheritance tax. Despite the fact that those ideas are only in the planning stages, they might have a significant influence on housing in China, where many families purchase property to pass down to their children.
From November 9 to 12, China's top leaders will assemble in Beijing for the less-than-enticing-sounding third plenary session of the Communist Party of China's 18th Central Committee. Despite the cumbersome nomenclature, prior meetings have played an important role in defining government policy, with Deng Xiaoping using one to deepen agricultural reforms and Jiang Zemin using one in 1993 to cement reforms that led to China's membership in the World Trade Organization.
This conference is President Xi Jinping's first clear opportunity to spell out his reform goals, a topic he believes is critical to his government - and for which he is willing to sacrifice China's economic growth, which is expected to be 7.5 percent this year.
Jin at Mizuho forecasts a 15 to 20% drop in the price of Hong Kong-listed developers such as China Overseas Land & Investment, one of the most well-known developers of high-end property, Agile Property, KWG Property, and Guangzhou R&F Properties, partly due to harsher housing laws.
According to the National Bureau of Statistics, housing prices in China's Tier 1 cities - Beijing, Shanghai, Guangzhou, and Shenzhen - have risen rapidly in the last year, with all of them above 20%.
According to government data, the 100 largest cities in China experienced an average growth rate of only 8.7% over the previous year, from January to September. However, due to a practice of issuing "dual contracts" - one with the purchase price of a house and a second with the "fitting-out cost," which is ignored by the local government - the pace of expansion is likely to be higher, particularly in larger cities. Developers can make prices appear more fair by moving a larger portion of their costs to the second contract.
According to government data, home prices in Guangzhou increased 20.2 percent year over year in September, while they increased 20.1 percent in Shenzhen, China's richest city in terms of per capita income. In response, the Guangdong Department of Land and Resources has imposed a six-month moratorium on land transactions that would establish new price records.
The federal government wants communities to take this kind of initiative on their own. Shenzhen did precisely that at the beginning of this month, upping the minimum down payment for second residences from 60% to 70%. For first-time homebuyers, the down payment is still 30%, and buyers cannot acquire a mortgage on a third house at all.
Other cities have taken steps to prevent so-called "land king" sales from setting new records. Beijing, which tops the country with a 20.6 percent increase in housing prices over the last year, and Hangzhou have both canceled land auctions that were expected to break records.
According to Jones Lang LaSalle data, Beijing's prime office location, Finance Street, is now the world's third most expensive, at US$137 per square foot per year. Only St. James and Central in London and Hong Kong are more expensive. As foreign investment banks and insurance companies compete with Chinese state-owned industries and banks, prices in the Chinese capital have risen.
The importance of real estate to the national economy is one major issue that the government is struggling to address, with property investment accounting for 15% of GDP in the first half of the year. Land sales are also an important source of revenue for local governments, with an audit of China's local-government debt estimated to be at least 15 trillion yuan (US$2.0 trillion), or about 30% of the country's entire economic output last year.
The government wants to promote consumer spending and other parts of the economy while discouraging property speculation and overinvestment. At the same time, the Chinese government is working to boost social security for those at the bottom of the economic ladder. One suggestion is to allow farmers to sell their land directly into the property market, as is done in other parts of the world. However, this would jeopardize local government revenue.
A "quite aggressive plan" to liberalize land sales arose a month ago, according to Société Générale, but was promptly rejected by the government. Wei Yao, a SocGen economist, believes that rather than a sweeping change, there will be a few more local tests with that kind of system in the near future, possibly as a result of this discussion.
Faced with ever-tougher regulations at home, Chinese investors have turned their attention abroad, and they are now the world's most powerful drivers of new-build property. According to Knight Frank, they are the leading buyers of new residential property in Sydney and Hong Kong, and they are becoming more active in other Asian markets such as Kuala Lumpur and Bangkok, as well as Western gateway cities such as New York.