China Recommits to Real Estate Regulation as Foreign Analysts Predict Changes

As observers take stock of the performance of China’s real estate markets in 2011 and attempt to predict what what will happen in 2012, the centre of speculation is on what will happen with government regulation of the residential sector.

After more than 18 months of trying to tame the country’s run-away property speculation, the government seems to have achieved its goals, as prices in most markets declined in 2011. Now in the face of potential further downturns in prices and the risk of a market collapse, many analysts are predicting that the government will lift many of the residential restrictions during 2012 to keep prices from declining precipitously and to “save” real estate investors from bankruptcy.

For the government, however, the situation is clear, with leaders at both the local and national levels reiterating the need for making housing affordable for the average Chinese wage earner, and to lessen the economy’s dependency on real estate speculation for growth.

According to a recent story in Market News International, top leaders such as Wen Jiabao recently laid out the government’s view on the country’s investment policies at a recent conference in Beijing.

The Chinese premier said in a speech at the National Financial Work Conference that his government will ensure that the real economy’s problems of tight money and high financing costs are addressed while clamping down on speculation.

“We must firmly prevent capital being invested into the fictitious economy for speculative purposes,” he said.

Fan Jianping, an economist with the State Information Center, a government think tank, warned a conference at the weekend that the real estate industry has lured capital away from more productive areas, including research and development.

At the local level, the mayor of Shanghai was even more to the point, declaring that Shanghai’s real estate prices should be reduced further during 2012. Which should help to clarify whether the government feels much pressure to bail out investors anytime soon. From a recent China Daily story,

Shanghai Mayor Han Zheng on Wednesday said the government will continue with its policies aiming to bring down the prices of the city’s new residential apartments.

Han told a municipal congressional meeting that Shanghai will carry on implementing the central government’s package of policies, which include mortgage restrictions and limits on the numbers of homes people can own, to cool the property market while increasing land supply and deepening property tax reforms.

However, many foreign analysts still see this government commitment as being short-lived. There is reportedly a consensus forming — the origin of which is unclear — that at least some of the restrictions on residential real estate will be lifted in mid-2012 to keep prices from falling too dramatically.  Just which of the many regulations would be lifted or modified is a subject of even greater debate.  This week Bloomberg spoke with a UBS economist who foresaw the government lifting market restrictions to bail out developers,

“The gap between supply and demand will reach the peak, and the supply will be 1.5 or even 1.6 times demand, and it will be a disaster for developers,” Chen Li, head of China equity strategy at UBS, said in a Bloomberg Television interview. “If you assume the property policy keeps stable in the coming year, that means by the end of the year the inventory of property will reach a new peak, around 10 years or even 20 years,” Chen said.

Chen said the stock market may rally in the second half after the government relaxes its property curbs, which may boost property shares.

The interview did not reveal any specific basis for Chen’s belief in the lifting of market restrictions other than the risk to real estate investors, however, it seems his forecast is supported by other industry analysts. In a recent interview with the China Daily, James MacDonald, the head of real estate research at Savills implied that a market consensus is forming around an easing of restrictions in late 2012.

“It is widely believed by market observers and experts that the policies will be loosened in the second half of 2012,” said Macdonald.

The worsening international economic situation means that central government policy is likely to focus on sustaining growth in the domestic economy and on employment levels. Therefore, the central government is likely to loosen the current tightening policy. An initial step was the reduction of the reserve-requirement ratio for lenders by 50 basis points, he said.

At the time that it reduced the bank reserve ratio requirement in December the government took pains to point out that the move was aimed at the greater economy rather than the real estate sector, but given how much of China’s GDP depends on real estate investment, separating the two may prove to be a daunting task.