Property tax and higher interest rates needed to prevent asset bubble in China, IMF warns

Existing measures are merely treating the symptoms of high residential real estate inflation and not the underlying structural causes, the IMF working paper report says.
 
Luxury real estate costs in Beijing and Nanjing and mass market prices in Shanghai and Shenzhen have become ‘increasingly disconnected from fundamentals,’ it warns but there is no sign of a broad based and significant over valuation of residential property in China.
 
China has already suspended mortgages for third home purchases, pledged to speed up trials of a property tax, and raised interest rates for the first time in almost three years. But low borrowing costs and a lack of alternative investments have resulted in excessive house price inflation, the report points out.
 
Chinese Premier Wen Jiabao has said that property prices can’t be pushed down by government controls alone and the IMF report says that it is too early to say whether government measures since April to cool the market will have a long lasting effect.
 
The latest available price figures show that real estate prices across 70 cities rose 8.6% in October from a year earlier.
 
However, the IMF welcomed the Hong Kong government’s latest policies to curb property speculation, but warned tougher measures might have to be used to avoid a protracted and painful downturn.
 
Nigel Chalk, a senior adviser to the IMF, said the new measures have succeeded in discouraging participation in the market’s irrational upswing shown by a sharp fall in property sales transactions over the past two weeks.
 
‘But what we don't know is what the life span of these measures will be and how long they will affect the market. We are in the wait and see period,’ he explained.
 
Property prices are now near the peak they reached before the last property bubble in 1997, with average home prices up 15% between January and September, following a 30% jump in 2009.
 
Hong Kong’s government has introduced several rounds of cooling measures since late last year, such as increasing land supply as well as temporarily excluding the use of real estate purchases in an investment immigration programme.
 
Two weeks ago it imposed additional stamp duties on properties that are resold within two years and higher down payment requirements for luxury home buyers.
 
Among additional measures suggested by the IMF are another increase in the stamp duty, further lowering of the loan-to-value ratio for more types of property, and a tightening of the limits on debt service ratios.
 
The IMF said pricing pressures will become increasingly visible in the coming months with inflation expected to reach around 5% by the end of 2011. The IMF also said it expects Hong Kong's gross domestic product to expand 6.75% this year, with growth moderating to 5 to 5.5% in 2011.
 
The city’s economy grew stronger-than expect 6.8% in the third quarter from a year earlier, accelerating from the second quarter’s 6.5% rise. The strong data prompted the government to raise its full year growth forecast for this year to 6.5% from a previous estimate of 5 to 6%, after a contraction of 2.8% last year.