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Friday, March 8, 2013

China says no property bubbles here please

Curbing inflation and raising GDP are key goals of Chinese monetary policy
Urbanization increases demand

By Sandy Cosser

Question: How does a country prevent a property asset bubble?
Answer: It makes the market unattractive to buyers.

That’s China’s tactic

According to CNN Money, over the past few years, China has become increasingly worried about falling into the same trap as other countries by allowing the property market to grow at such a rate of knots that a crash is inevitable.

As a nation, China is a bit of a control freak. It’d be kind to say that it has a Type-A personality. So, when its property market started hinting at massive growth (and a potentially colossal crash), it decided to step in and save itself from itself. It started with increasing the deposit amounts and increasing loan approval criteria.

But that wasn’t enough. So now, people who sell their homes will be hit with staggering capital gains tax rates. According to China.org.cn, capital gains tax on private property sales will go up from 1 – 2 percent to a very deterring 20 percent.

It will also be very difficult for people to own more than one home, especially if they want to buy in a city in which they don’t live.

Will it work?

A Financial Times article says that the measures might not have the curbing effect that the Chinese government hopes for. The article cites Lu Ting, Bank of American Merrill Lynch, who said that instead of driving down property sales, all the measures will do is decease interest in existing property. Demand for new property may go through the roof.

The article also cites Yon Bocheng, director of the real estate research centre in Fudan University, who said that local governments are going to be very reluctant to enforce the measures because the higher the property prices and the more property sold, the higher the land revenues. And, high revenues are always preferred over low revenues.

Far-reaching effects

Aside from unforeseen consequences in the Chinese market, their tightened control on private property could have potential knock-on effects around the world. It’s already been reported that European markets suffered after the ‘cooling measures’ were announced.

It remains to be seen whether these cooling measures will have the desired effect, whether they will be properly implemented and enforced, and whether any further measures will be forthcoming. But, as China has its sights set on becoming the world’s largest economy, international markets need to pay careful attention to any hint of action.

About the author: Sandy Cosser is on the cusp of putting her first step on the property ladder and is anxiously watching international trends in case they should affect the size of her home loan and the magnitude of her interest rates.

* Image credit: Images_of_Money; CC BY-2.0