New property market cooling measures announced by China’s State Council on April 15 seek to curb speculative demand for real estate by raising down payment requirements and mortgage rates, while giving local government officials the responsibility for failing to stabilise property prices. If the measures work, which I think they might, then property prices in China’s major cities could be headed substantially lower over the medium term.

Se Shang Property Index

Local government demand has been a major driver of property price appreciation over the past year, and giving local officials explicit responsibility for cooling prices should take away a large source of demand as they will discouraged from bidding up land prices to boost land sales revenues. With property prices in first tier cities a long way out of line with incomes and rental yields, and the economy increasingly dependent on real estate construction, a decline in property prices and an economic slowdown in H210 look likely, which could have far-reaching global implications.

If the Se Shang Property Index is anything to go by, real estate prices could be heading down rather quickly. The index peaked in mid-2009 and after selling off aggressively in response to the new lending restrictions, further losses look likely.

Tags: Bubble, China, Housing, interest rates, local governments, Property, Real Estate, tightening
Posted in: Asia, China, Financials, General
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