Sunday, June 24, 2012

China softening property restrictions in areas not horribly overvalued

The FT reports that the government is making some small changes to the blunt instrument restrictions they put on the property market. Some areas, they point out, are not as crazy overvalued, but are caught up in the restrictions. China moves to lift property market
Aware of the dangers, the central government has started to loosen its reins ever so slightly. It has encouraged banks to offer discounts on mortgages to first-time home buyers and has prodded developers to increase construction of cheaper homes.
"Prodded"? The central government has been commanding developers to build affordable housing, and the numbers on units they break ground on is questionable. There is no funding to build the units and developers accustomed to juicy margins have not been receptive to charity work.
In China, economists see a house prices-to-income ratio of about 7 as reasonable, as was historically the case in fast-developing Asian economies. The norm in rich countries is closer to 4. Ms Yao of Dragonomics says the good news is that the nationwide market is fast approaching the preferred level as housing prices edge down while wages climb. The price-to-income ratio for houses peaked at 8.1 in 2009, but fell to 7.4 last year and will decline further this year, according to the Shanghai E-House real estate research institute.
7 was the ratio before 100 million rural dwellers moved urban and another 240 million were expected to migrate. That means new housing needs to be for the median salary, not the top 2%.
The bad news is that the price-to-income ratios in China’s leading cities are still extremely high: 12.4 in Shanghai, 11.6 in Beijing and 15.6 in Shenzhen.
Restrictions on buying a second home have shrunk demand. Well, that certainly implies that the top few percent drove the market up buying in bulk and prices will not find a landing until the ratio is much lower. Maybe not the 2.75 to 3.5 in the Western world, but given the shift in population, lower than 7.

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