Chinese home buyers squeezed by interest rates; Beijing triples transfer taxes; waterfall price declines coming

房价跌幅赶不上利息上涨 购房者纠结左右为难

The article comes from the Lanzhou Evening paper. Lanzhou is the capital of the western province of Gansu, a province much poorer than the eastern provinces. The first part of the headline translates as "Home price declines cannot keep up with rising interest rates," the second half says home buyers are in a bind. The article starts off discussing price declines in first tier cities that have spilled into second tier cities. Home buyers are tempted by the lower prices, but mortgage rates are climbing.

The reporter finds some areas have discounted prices by 4%, 3% with a mortgage. He then finds that a 15 year mortgage starting in January 2012 has an interest rate of 7.05%. The property he looked at costs 7850 yuan per square meter. A 3% savings equates to 236 yuan per square meter. The mortgage costs 1803.2 yuan per month. Since interest rates have risen over the past six months, this equals an extra 27.8 yuan per month.

Home buyer Dou Ai says, "These days I constantly hear about falling home prices, so I want to have a look, if the price is suitable then I'll buy a home." She has lived with her in-laws since getting married, so as a first time home buyer she can take out a mortgage (to reduce speculation, many areas have restricted mortgages to first homes only, or raised the down payment very high in order to deter speculation), but after carefully calculating the numbers, she finds there's no deal. The central bank raised interest rates three times this year and while prices drops have occurred in first tier cities, they're really hard to find in Lanzhou. After calculating the higher interest cost, it turns out it costs more to buy a home now than it did earlier in the year. She says she'll "continue to wait and see."

Interest costs are up 5% to 10% over last year. The reporter then drops this bomb into the story:
If home prices fall 20%, home buyers costs will be the same as last year. If they fall less than 20%, the banks benefit (I assume through higher volume of business), but home buyers don't have any benefit whatsoever. Only if home prices fall more than 20% can home buyers enjoy a discount. Lanzhou prices rose 0.2% in October, although that's very small, it's a stark contrast to the price declines in first tier cities.

This is the result of an October policy shift: Raises of first-home mortgage rate shadow China's real estate market
China Construction Bank, China's second largest state-owned bank by market value, on Oct. 15 an nounced an increase of its mortgage rate for first-home buyers to 1.05 times of the central bank's benchmark lending rate. China's commercial banks in at least 14 major cities also have lifted the rate by 5 to 10 percent.
Before 2010, it was common practice for Chinese banks to offer first-home buyers a discount of 30 percent off the benchmark mortgage rate. The discount was then gradually reduced to 15 percent in mid-2010, and then canceled in early 2011.
The total mortgage payment for first-home owners has increased up to 40 percent from previous discounted rates.
"Given the liquidity pressure, banks need to reallocate their dwindling credit to other more profitable loans. Raising the mortgage rate is one of the approaches we rebalance demand and supply," said Zhu Xiaohuang, vice president of China Construction Bank's Beijing Branch.
A massive deflationary stew is brewing in China and waterfall declines are coming. The 20-30% price cuts have been sporadic; citywide prices aren't down anywhere close to that amount. Rising interest rates are eating up home price declines and that is just kicking in now. On top of that, Beijing has tripled the tax on transfers.

北京市二手房最低税价猛增两倍 交易顿时变冷清

Beijing has tripled the tax on home transfers, chilling the secondary market. Up until now, we've only seen big discounts from home developers. Average home prices have remained steady until now, but this new tax could rattle the market and set off larger declines. The article mentions a woman who wants to buy a property than fell 60,000 yuan in price, but now the transaction tax is 10 to 20,000 yuan. The article gives a few examples of taxes that went from several thousand to almost 20,000 yuan. However, taxes are higher for properties sold before 5 years. One example is a 150 square meter apartment in Zhongguancun, a high-tech area in Beijing, also near the top universities. The tax on this apartment went from over 100,000 yuan to more than 300,000 yuan, or nearly US$50,000. The article mentions one person's opinion that prices were set to drop 10-15% early next year, but this tax could knock prices down another 15%, so they could come down 25-30%. It goes on to talk about the agents, who are pushing harder for business. I have first hand experience with this, as real estate text ads have become much more frequent in the past month or so. What does this mean for local governments?

房价下跌“土地财政”受挫 地方政府面临限购与增收纠结

This article covers the effect on government. Dalian, a port city in northeast China, has seen land sale revenues tumble 50% from last year. Across 25 cities in China, revenue is down 117 billion yuan, a decline of 11%. Property taxes have started in Shanghai and Chongqing, but the market is changing must faster than the government. Without stable property tax revenues, governments could see their revenues implode next year, given that many rely on land sales for the majority of their revenue.

To sum things up: home prices need to fall at least 20% in order for buyers to see their costs decline, due to higher interest rates and taxes. There's some local differences such as the high transaction tax in Beijing, but overall, it seems that 20% is a good rough estimate. On top of that, prices will need to fall at least another 5 to 10% to attract buyers who now expect price declines. Now we're talking about a 30% price decline as the baseline scenario! Markets always overshoot and China will be no different. Waterfall price declines are coming in 2012; local government and the banking sector will be severely impacted. Addendum: Here's a timely article given that a collapse of the property market will damage the banking sector. Beijing Can't Use Its Reserves to Save the Banks. The authors are Carl E. Walter and Fraser J.T. Howie, coauthors of "Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise." I just received my copy in the mail.

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