Home prices in China are heating up again, and some marginal restrictions on the demand side (especially in major cities) are possible. However, our China Investment Strategy service doubts that the government will continue to pursue the vicious cycle of rising home prices, aggressive policy tightening, serious supply shortage and even higher prices.
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China’s rigid land policy is one of the core reasons behind the massive increase in land and home prices. Furthermore, our China team has argued consistently that the numerous housing tightening campaigns by the government over the past decade have largely proven counterproductive, as they further distorted the housing supply/demand balance and augmented the upward pressure on home prices.
A more comprehensive solution is needed to address bubbly home prices in China, and our China Investment Strategy service offers a possible resolution to this key macro uncertainty affecting China.
First, the state monopoly over land supply should be reformed, and the tight restrictions on rural land for residential purpose should be relaxed. Privatization of land is still a policy taboo ideologically in China. However, there are already some pilot programs allowing limited freedom for transfer of rural residential land in some provinces.
Second, the Chinese government has also been experimenting with property taxes for homeowners in some cities, and we expect these programs to be progressively expanded nationwide in the coming years. Property taxes not only increase the holding costs of properties and reduce property hoarding, but also provide a constant income stream to local governments, reducing their reliance on land sales for fiscal revenue.
Finally, since the housing sector reform in the late 1990s, the government has dramatically reduced its provision of residence for its citizens, while private developers have played an increasingly dominant role. The government’s aggressive subsidized housing projects announced in recent years have not yet had a meaningful impact on the overall housing supply situation, but the push for more public housing will likely be a main theme going forward, which should support overall construction activity.
Due to very restrictive mortgage lending standards and large down-payment ratios, we have not been overly concerned about a chaotic decline in home prices and systemic damage on the banking sector. However, poor residential affordability and the associated heightened social tension also mean that the government will have to regain control over run-away home prices with creative and pragmatic new approaches.
We will continue to follow up on this issue in the coming weeks.
Source: BCA Research
