China: Deflating residential property bubble – ING

In view of Iris Pang, Economist at ING, the recent measures of purchase and resale restrictions imposed on 2nd and 3rd tier Chinese cities will deflate but not burst the bubble.

Key Quotes

“There are a few local governments of the 2nd and 3rd tier cities imposing tighter purchase and resale restrictions on home buyers. Purchase restrictions are not new to the China market. The reaction of the equity market on the property sector comes from resale limitation of residential properties. Some cities restrict the resale for up to five years.”

“The impact of resale restrictions would deter speculators to enter the residential property market. This would test how much demand is really for self-use purpose.”

“We believe that demand for self-use in 3rd and lower tier cities is low as a large proportion of people who lived in these cities have moved to the 1st and 2nd tier cities to work. Residential property prices in lower tier cities would not come down because restriction on resale will stall transactions. Even seller who want to sell their properties by cutting prices will need wait for 2-5 years depending on the cities’ resale requirements. As such there will be little impact on 1st and 2nd tier cities that have solid self-use demand.”

“All in all, we expect prices will come down only slowly in prime locations, transactions will be thinner anyway.”