China has reversed its five-year-old policy on second home purchases and cut property taxes, in a further sign the sector is dragging the economy lower, even as the central bank signals more rate cuts are likely.
The People’s Bank of China and other government agencies announced the co-ordinated campaign on Monday evening, in a bid to boost the housing market which is suffering from falling prices and chronic over-supply.
The changes mean the minimum down-payment on a second property has been cut to 40 per cent from 60 per cent previously.
In addition, those selling a property after two years of ownership will no longer be required to pay taxes, while restrictions on using retirement savings to buy an apartment have also been eased.
“The housing market correction continues to be seen as one of the key drags on domestic demand growth for 2015,” JPMorgan’s China economist, Zhu Haibin said.
“Overall, we expect the housing market correction will continue, but at a relatively modest pace through the course of the year.”
The housing down-turn has been a key drag on the iron ore price, which is hovering around a seven-year low and threatening to break through $US50 a tonne.
Any turn-around in the housing market should increase demand for the key steel making commodity and boost prices in the longer term.
China lifted the minimum down payment on a second home from 40 per cent to 50 per cent in April 2010. The threshold was further raised to 60 per cent in January the following year.
RILING AGAINST SPECULATION
At around the same time, all lending on those wishing to buy a third property was banned.
The measures to restrict the housing market were led by former premier Wen Jiabao, who spent much of his final years in power riling against property speculators.
The restrictions succeeded in cooling the housing market, but also triggered a buyers’ strike that at times over the last two years has threatened to cause wider economic problems.
The new administration led by President Xi Jinping has gradually unwound many of these restrictions, including those on third home purchases.
The easing is all part of efforts to revive the housing market, which saw an 18 per cent decline in area sold over the first two months of the year, compared to the same time in 2014.
The area of new apartments under construction fell by nearly 20 per cent over the same period.
“This is another step to stabilise the economy,” Mr Zhu said of Monday’s announcement.
He expects the housing down-turn to continue for much of the year and for real estate investment growth to ease from 10.5 per cent in 2014 to 6.5 per cent this year.
The Chinese economy is set to grow at 7 per cent this year, although a further deterioration of the housing market could make it difficult to achieve this target.
The weak housing market has seen money pour into China’s stock markets, which are trading around seven-year highs.
Also fuelling the market is an expectation that the government will shortly announce another cut to official interest rates or the Reserve Requirements Ratio, which is the amount of capital banks must keep aside.
“We think the sharp drop in economic activity since the start of the year, along with lower inflation, will encourage greater action from the PBOC over the coming months, including further RRR reductions and at least one more cut to benchmark interest rates,” China economist at Capital Economics, Liu Chang said.