How far will Chinese house prices fall? National house prices had their third monthly decline in November, a fall of 0.3%, according to the China Real Estate Index System (CREIS). In Beijing, new apartment prices were 13.45% down y-o-y to October 2011, after rising 18% during 2010. Shanghai experienced a much smaller price-drop of 0.39%, according to the National Bureau of Statistics of China (NBSC).
In the 4th quarter, the downward trend is intensifying. In fact each month, for several months, more regions have reported falling house price, and fewer regions have reported rising prices.
The slowdown follows market-cooling measures first introduced in April 2010. The campaign intensified in 2011. The down payment for first-time buyers’ mortgages was increased to 30% from 20%, that for second homes rose to 60% from 50%. Mortgages for third home purchases were prohibited. There were limitations on home purchases in more areas, credit-quota limits and higher benchmark lending rates, and new property taxes in Shanghai and Chongqing - between 0.4% and 0.6% in Shanghai, and between 0.5% and 1.2% on luxury homes and newly purchased high-end homes in Chongqing,, plus a special tax on second home purchases by people with no business or employment interest in the city.
The PBOC benchmark lending rate was raised to 6.56% in July 2011, the third interest rate hike this year.
China’s economy is now slowing significantly, with 9.5% GDP growth forecast this year, down from 10.3% growth in 2010. China’s official manufacturing purchasing managers index (PMI) dipped below 50 in November, for the first time since the recovery.
At the beginning of December, the remnimbi persistently fell to the bottom of its official trading range against the dollar. Beijing acted to support the remnimbi, by selling foreign exchange reserves. “The currency has never come under such sustained selling pressure, not even at the higher of the 2008 financial crisis,” noted Simon Rabinovich and Robert Cookson of the Financial Times.
In the 4th quarter, the downward trend is intensifying. In fact each month, for several months, more regions have reported falling house price, and fewer regions have reported rising prices.
The slowdown follows market-cooling measures first introduced in April 2010. The campaign intensified in 2011. The down payment for first-time buyers’ mortgages was increased to 30% from 20%, that for second homes rose to 60% from 50%. Mortgages for third home purchases were prohibited. There were limitations on home purchases in more areas, credit-quota limits and higher benchmark lending rates, and new property taxes in Shanghai and Chongqing - between 0.4% and 0.6% in Shanghai, and between 0.5% and 1.2% on luxury homes and newly purchased high-end homes in Chongqing,, plus a special tax on second home purchases by people with no business or employment interest in the city.
The PBOC benchmark lending rate was raised to 6.56% in July 2011, the third interest rate hike this year.
China’s economy is now slowing significantly, with 9.5% GDP growth forecast this year, down from 10.3% growth in 2010. China’s official manufacturing purchasing managers index (PMI) dipped below 50 in November, for the first time since the recovery.At the beginning of December, the remnimbi persistently fell to the bottom of its official trading range against the dollar. Beijing acted to support the remnimbi, by selling foreign exchange reserves. “The currency has never come under such sustained selling pressure, not even at the higher of the 2008 financial crisis,” noted Simon Rabinovich and Robert Cookson of the Financial Times.
Analysis of China Residential Property Market »
RENTAL YIELDS
Last Updated: Feb 28, 2011
When we first began to gather data on China, gross rental yields in all categories of Beijing condominiums were above 9%, and gross rental yields for villas in Beijing ranged from 9.5% to 13%. In Shanghai, returns were less stellar, with gross rental yields on apartments ranging from 5.4% to 7%.
Today, gross rental yields on almost all sizes of apartments in Beijing are below 2.5%, and in Shanghai below 3.2%.
We find the official statistics in China confusing. And as it happens, our own data-gathering in China has been rather inconsistent. We’ve relied on high-end expat-oriented sites some years, and on lower-end Chinese-language sites in other years.
But it is hard to escape the fact that prices have been climbing steeply, while rents have not moved much.
Yields below 3% are a danger signal. We were reluctant to join the chorus warning about a bubble in China in previous years, for the good reason that in 2008, apartments in most large cities in China had rental yields above 5%, a level which we generally consider ‘safe’.
However last year we declared that, with that yields of less than 3%, the danger signals were flashing red. We were the first to warn that a crash was likely in the Baltics, and then, our signal was that yields dropped below 3%. We gave similar warnings in Dubai.
So last year we gave the same warning about China – and we were right. It’s not been a exactly a crash, but for sure the period of market ebullience is over. Prices have risen so high that it is inconceivable that they will continue to rise.
Chengdu is an exception. Yields appear healthy here. We’re not sure if this is some kind of statistical fluke, and it certainly seems somewhat odd that yields on large apartments, according to our research, are above those on smaller apartments. But that’s the picture we get. Chengdu looks a little like Beijing and Shanghai used to look like, in terms of return on investment.
Today, gross rental yields on almost all sizes of apartments in Beijing are below 2.5%, and in Shanghai below 3.2%.
We find the official statistics in China confusing. And as it happens, our own data-gathering in China has been rather inconsistent. We’ve relied on high-end expat-oriented sites some years, and on lower-end Chinese-language sites in other years.
But it is hard to escape the fact that prices have been climbing steeply, while rents have not moved much.
Yields below 3% are a danger signal. We were reluctant to join the chorus warning about a bubble in China in previous years, for the good reason that in 2008, apartments in most large cities in China had rental yields above 5%, a level which we generally consider ‘safe’.
However last year we declared that, with that yields of less than 3%, the danger signals were flashing red. We were the first to warn that a crash was likely in the Baltics, and then, our signal was that yields dropped below 3%. We gave similar warnings in Dubai.
So last year we gave the same warning about China – and we were right. It’s not been a exactly a crash, but for sure the period of market ebullience is over. Prices have risen so high that it is inconceivable that they will continue to rise.
Chengdu is an exception. Yields appear healthy here. We’re not sure if this is some kind of statistical fluke, and it certainly seems somewhat odd that yields on large apartments, according to our research, are above those on smaller apartments. But that’s the picture we get. Chengdu looks a little like Beijing and Shanghai used to look like, in terms of return on investment.
TAXES AND COSTS
Last Updated: Sep 01, 2011
Rental Income: In general, leasing property is subject to business tax, individual income tax, and real estate tax. In Shanghai, gross rental income is taxed at an integrated rate of 5%.
Capital Gains: Net gains from transfer of property are taxed at a flat rate of 20%.
Inheritance: There is no inheritance or gift tax in China.
Residents: Rental income earned by resident individuals is taxed at a rate of 10%.
Capital Gains: Net gains from transfer of property are taxed at a flat rate of 20%.
Inheritance: There is no inheritance or gift tax in China.
Residents: Rental income earned by resident individuals is taxed at a rate of 10%.
BUYING GUIDE
Last Updated: Nov 16, 2006
Total round-trip transaction costs are around 4.86% to 13.65% of the property value. Most of the costs are shouldered by the buyer, including the 3% - 5% Deed Tax and Business Tax of 5%. There are three procedures needed to register property which is usually completed in 32 days.
LANDLORD AND TENANT
Last Updated: Jun 19, 2006
The Chinese system is generally pro-landlord.Rent: There is no rent control in major centers such as Beijing, Shanghai, Guangzhou, and Shenzhen. Rent adjustments are subject to the provisions of the contract.
Guaranty Money: The landlord typically collects guarantee money (security deposit) of two to three months rent on top of a month's advance payment. If the tenant prematurely terminates the contract, he loses the guarantee money and down payment.
ECONOMIC GROWTH
Last Updated: Dec 09, 2011
China's growth to slow mildly; inflation trouble
After emerging from a “slowdown” of 8.7% in 2009 and 9.6% in 2008 with 10.3% growth in 2010, China’s economy is expected to face another mild slowdown in 2011. The IMF predicts that China’s GDP will grow by 9.5%. The IMF’s view is based on a forecast decline in external demand, decelerating investment and the current tightening policies. The slowdown was strongly evident in Q3 2011. China had its weakest growth in more than two years. GDP grew by 9.1% annually in the third quarter, the third consecutive quarterly decline following 9.5% growth in Q2, and 9.7% growth Q1 2011.
Despite tightening, inflation still poses a risk. The IMF expects inflation to be 5.5% this year.
The government has raised benchmark interest rates three times this year, and hiked reserve requirements for commercial lenders six times.
Other problems include rising inequality and the increasing demand for freedom. Unless these issues are addressed, some say a Tunisia-type revolution in China is not unthinkable in future.
Far-fetched? Yet China protested the award of the 2010 Nobel Peace Prize to Lu Xiabao, a Chinese human rights activist imprisoned by the government. China’s heavily-censored internet and television has blocked any mention of his name, or of the Nobel Peace Prize. Similarly, China has restricted Google searches for the word ‘Egypt’
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