Home prices in Chinese cities to continue rising

In response to record high house prices and public discontent, local authorities in more than 10 major Chinese cities have rolled out new tightening measures since last month.

Financial institutions and analysts, however, expect prices in major Chinese cities, especially those with tight supply, to continue rising in 2014, defying local government's latest macro-control efforts.

Tightening amid record high prices

Driven by rapid urbanization, huge demand and speculation, house prices in major Chinese cities have spun out of control in recent years. It has become a major headache for both the central government and local authorities as more people are priced out of the market.

Other reasons behind soaring home prices included limited investment channels, unbalanced urban development across different regions, weak social management and over-reliance on land supplies for fiscal income by local governments.

In October, house prices continued to rise. According to the National Bureau of Statistics, property prices in 69 of China's 70 major cities grew year on year last month, reflecting strong underlying demand for residential homes.

The number of cities recording strong price gains of more than 10 percent year on year increased to 21 in October from 14 in September, a record high so far this year.

The four tier-1 cities -- Beijing, Shanghai, Guangzhou and Shenzhen -- have maintained their record of posting the highest growth in property prices, at over a staggering 20 percent year on year in October. Their home prices soared to record highs.

As before, authorities in these cities announced additional tightening measures, in an attempt to manage soaring home prices.

Starting in October, the four tier-1 cities and eight tier-2 cities -- Wuhan, Zhengzhou, Nanchang, Shenyang, Xiamen, Changsha, Nanjing, and Hangzhou -- unveiled their new property control policies.

Zhang Dawei, an analyst with property agent Centaline Property, expected another 10 major cities to release their new measures before the end of the year.

Hu Zhigang, deputy head of China Real Estate and Housing Research Association, said the latest tightening measures by these cities employed traditional tools such as lower loan-to-value ratio, home-purchase restrictions and setting a home price ceiling.

In their new efforts, these cities also emphasized stricter enforcement of existing property measures, raising transaction costs for second home purchasing and increasing supply of government-subsidized houses, Hu said.

Undersupply and more price gains

Analysts maintained that new tightening measures by major cities might result in a short-lived cooling of the market, as the previous rounds of control efforts.

But house prices in these cities, especially mega-cities faced with undersupply, are likely to continue rising in 2014 to new highs.

J.P. Morgan Chase, in its latest industry report, forecast that the undersupply situation is likely to continue in tier-1 cities and some tier-2 cities next year owing to less land supply over the years.

For most tier-2 and lower-tier cities, J.P. Morgan said the market would continue to see more land sales than gross floor area sold, which should start kicking in and have a negative impact on the market in 2014.

Accordingly, it forecast a 10-percent growth in the average selling price of houses in tier-1 cities, 5 percent to 10 percent price growth in tier-2 cities with better supply-demand dynamic and a flattish price for those with worse demand-supply outlook.

J.P. Morgan said it was "constructive" on the Chinese property sector for 2014. "The positive factors that have driven property prices over the past few years, including economic growth and income growth, have remained and are likely to remain strong."

J.P. Morgan said it expected no new nationwide policy to come out in 2014 and both administrative and monetary policies should remain stable next year, despite discussion of a real estate tax.

A reform plan, unveiled on Nov. 15 by the Communist Party of China Central Committee, said the country would speed up legislation of a real estate tax, and build a nationwide home ownership database.

While many are worried about the potential impact from the real estate tax, J.P. Morgan expected the impact would be limited, and would not result in a substantial slowdown in the market.

China started implementing the real estate tax, on a trial base, in Shanghai and Chongqing in January 2011.

J.P. Morgan maintained that the real estate tax might be implemented in selected cities with bad home affordability, but would not be expanded nationwide, and rates should remain low.

It listed cities with bad affordability as Beijing, Shanghai, Guangzhou, Shenzhen, Hangzhou, Xiamen and Haikou, which would probably face higher policy risks. For these cities, the real estate tax and the loan-to-value caps are the tools which local governments are likely to use, J.P. Morgan added.

CCB International Securities, owned by China Construction Bank, said in its latest report that the Chinese property market is likely to have "a roaring start" in the first quarter of 2014.

After that, the market is expected to soften under a succession of price curbs, credit tightening and slowing sales growth, it said, adding that the sector's future might rest in China's aggressive move to urbanize.

Property curbs tend to be relatively more relaxed once GDP growth slows, and tighter after economic growth recovers, CCB International Securities said, predicting a period of relatively lax property controls in the second half of 2014.

The property industry has become a significant supporting force for China's economic growth.

Analysts expected China's future property policies would have to strike a tough balance between the decelerated growth of the economy and the rise in home prices.