C&B Notes

China Piles On the Stimulus

China is active in the global race to stimulate domestic economies in creative and aggressive ways.  Communist Party officials continue to fiddle with a variety of levers, with the latest measure being a reduction in the down payment requirement for some second homes.  The inflated property market is declining, and this policy is designed to reverse that trend.

China is ramping up efforts to support its flagging housing market in a new sign that Chinese leaders are worried about economic growth.  Buyers of second homes would be required to make a minimum down payment of 40%, down from the previous 60%, as part of efforts to encourage upgraders to take the plunge, the People’s Bank of China, the housing ministry and the banking regulator said in a joint statement.  Property owners will be exempt from paying a business tax on the sale of an ordinary home if they have owned it for at least two years, down from the previous minimum of five years.  The tax, which is around 5.5%, is usually added to the bill and paid for by home buyers instead.  The moves signal that Beijing is increasingly worried that the weak property sector is hampering growth. China said 2014 growth was the slowest in more than two decades and has set its annual target for this year at an even lower rate.

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Average home prices fell in February on a year-on-year basis for the 10th straight month, as property developers struggle with excess inventory and resort to price-cutting to entice home buyers.  The property sector accounts for nearly one-fourth of the Chinese economy, according to some estimates, after taking into account related industries such as building materials, home appliances and transport.

China has cut interest rates twice, once in November and another in February, as well as lowered the amount of money banks have to set aside as reserves, moves that would help to ease the liquidity environment but has so far had a limited impact on potential home buyers.  Housing sales in the first two months this year fell by 16.7% from the same period a year earlier, the sharpest dip in three years.  “The benefits of this aren’t going to be as much as expected,” said Jinsong Du, an analyst at Credit Suisse.  He said on a recent trip to what is called a second-tier city in China — considered less developed than the likes of Beijing or Shanghai — that many developers are already offering flexible-payment programs.  These include delayed payment plans for the down payment, or having another financial institution offer a loan to home buyers to help pay the down payment…

In late September, the PBOC and the country’s banking regulator loosened mortgage restrictions by allowing purchasers of second homes to be considered first-time buyers if they have paid off their first home mortgages.  They also encouraged banks to offer as much as a 30% discount on benchmark rates for mortgages.  Beijing has started to loosen property regulations to encourage more sales since April 2014.