Analysis: China property boom may trigger policy action

China's residential property prices are expected to post solid rises in the first half of 2010, so prompting authorities to step in more aggressively to prevent an asset bubble from forming.

The biggest price rises are likely in the main cities of Beijing, Shanghai and Shenzhen but authorities are likely to keep to a policy of broad-based sector measures to control the overall market's growth.

Speculative buying in some of these cities has already seen residential prices surging by as much as a third this year, analysts said.

"In the long term, there should be price increases definitely. The government is expecting that, but they don't want to see the market too volatile because it is not healthy," said Kaven Tsang, a property analyst at Moody's in Hong Kong.

"At a certain point, there will be a downward adjustment and that will also hit the public as well as the banking sector. And therefore, the government would like to control the price growth," Tsang said.

Analysts see the biggest risks for the sector in the first half of the year, rather than the second, due to a lack of supply, with prices on high-end apartments in cities such as Beijing, Shanghai and Shenzhen expected to rise up to 20 percent.

The government is likely to cool the sector with measures such as scrapping a 30% discount in mortgage rates, raising transaction taxes, land supply and downpayments.

China's overall residential property prices are predicted to be steady or rise as much as 5% by the end of 2010 from this year's levels, with prices seen pulling back from their peaks in the second half of the year, a Reuters poll showed.

Measured moves

Michael Wu, a director from Fitch Ratings, expect prices to rise by about 10% in the first half from current levels, before retreating to around current levels by the end 2010.

"We do not expect the government to do a lot to curb market prices. If they do a lot, they will overdo (it) and affect domestic consumption," Wu said.

The real estate sector is a main pillar of the world's third largest economy, with property investments alone accounting for about 12% of the country's gross domestic product.

Over the past two years, China has drastically shifted its policy, alternating between applying and releasing brakes to the sector, which sometimes caused swings in the stock market.

This month, China's cabinet vowed to curb property speculation by increasing supply of lower-cost housing and stipulating that individuals will have to own their homes for five years, instead of two previously, to enjoy a sales tax exemption.

A combination of such property-targetted measures, a likely tightening in monetary policy by the central bank and an expected increase in supply are likely to see prices come off from their highs in the second half of next year.

A series of apartment projects being developed by companies such as China Overseas and China Vanke will likely be completed next year. Some developers have also resumed their projects this year after putting them on hold for months during the global economic downturn.

Many of them are expected to hit the market in provinces like Jiangsu and Nanjing, and cities such as Beijing and Shanghai in the second half of 2010, analysts said.

"I'm not worried about a bubble because China's economic growth is pretty solid and people are wealthy," said Vincent Lo, chairman of Shui On Land, one of the first Hong Kong-based companies to invest in China in the 1980s.