Realty curbs send jitters

The Chinese stock market suffered a relapse this week, shattering the bullish mood of the new year. This time, it was the government’s renewed efforts to douse the suddenly perky property market that panicked investors across the board.

Chinese market sentiments are now heavily influenced by Internet stock advisors and any news, especially those related to the property sector, get amplified out of proportion, resulting in fickle and unreliable behaviour. Recently, unnecessary panic broke out due to the prospect of tightening policy measures and new property taxes. This not only led to some panic buying of real estate, but resulted in stock investors dumping their holdings, even while there was profit to be made.

Property has a complex impact on the stock markets. Although some of the largest property developers in China are not listed in the Mainland, there are myriad ways in which investors get affected. The government’s housing policy and movement of real estate prices have a far-reaching impact on stocks, especially those of banks which hold vast amount of property-related loans. Also, real estate portfolio makes up a large part of the net worth of a typical retail investor. When an investor senses that the value of his home may fall, he’s much less likely to risk his savings in stocks or other risky investments. For this reason, the Chinese stock market remains ultra-sensitive to property price movements.

Twin pressure

So what were the two factors that led to panic and over-reaction in sentiments? For one, the central bank introduced more monetary policies to cool home prices, promising more stringency in future. The latest measures include steeper down payment rates and other special interests rates for housing loans. Since early March, there has been panic buying in the property market as investors rushed to avoid a new 20 per cent income tax on pre-owned home sales on the secondary market in some first-tier cities.

According to the new rules, homeowners who sell their flats will be levied an income tax as high as 20 per cent on the profit they make on a transaction. Prior to the new rules, the income tax levied was 1 to 2 per cent of the sale price. The new rules sparked frenzied activity in the resale home market, as both buyers and sellers were alarmed about the soaring transaction costs. A total of 9,400 homes sold in Beijing, last week, a rise of a whopping 279.5% year-on-year.

In the first two months of 2013, property sales growth increased from 11 per cent year-on-year in the fourth quarter of 2012 to about 50 per cent year-on-year, while average home price in January and February surged 20.6 per cent, according to the China Index Academy. These upward figures for real estate coincided with the positive behaviour of the Shanghai Index too, but the tax buzz has now robbed the markets of all enthusiasm.

However, a second blow was delivered to both the property and stock market when several Chinese cities were deemed to be ‘technically ready’ to join the property tax net - following Shanghai and Chongqing. Soon after pleading to implement tightening measures on the housing market, the government declared its intent to expand experimental property tax reforms.

In 2010, China was desperate to cool its property market amid growing public complaints over runaway housing prices and thus introduced trial imposition of property taxes. Chongqing focused on taxing high-end housing while Shanghai targeted owners of multiple houses. Due to its limited scope, the taxes imposed in the two cities have not played a significant role in keeping local house prices in check, but the mere threat of these taxes remain a useful and long-term tool to regulate the mayhem that can be caused by real estate speculation.

Panic unnecessary

The moot question remains, whether market fundamentals have been affected. Analysts say there is little reason to be gloomy as the economic outlook is bright and Chinese policy-makers have announced sweeping reforms in administration. Major government departments and ministries, like the railways and population control, will be reworked, approval processes for new business activities are being streamlined and industry independence will be of paramount importance. Taken in this context, the vagaries of property market ought not to play havoc in the Chinese bourses in the long term.

The writer is a freelance journalist based in China.