China worried about real estate bubble bursting

POLITICS - On Wednesday China brought in fresh measures to curb real estate prices in China, including local price controls. A property tax, widely anticipated, was not announced despite growing worries that China's real estate bubble is dangerously large and could implode.

City governments must set property price control targets and make the targets public in the first quarter of 2011. The targets will be in line with local economic factors.

China’s city governments have a vested interest in this topic since its a major source of their tax revenues.

China also announced new rules which require a 60% down payment for second-home buyers, up from the current 50%. First time home buyers are unaffected.

There is also a new law barring local residents from buying a 3rd home if they already own 2 homes in the area.

China has also told banks to restrict lending to developers in the hopes that fewer new projects will shorten demand (its the opposite, smaller supply will only raise prices and encourage bidding wars).

“These are the unprecedentedly harsh policies, and will definitely weigh down (property) prices,” said Hua Zhongwei, an analyst with Huachuang Securities in Beijing.

Despite the slew of measures that China is taking property prices are remaining stubbornly high. The goal is to cool the real estate market so the bubble becomes more stable and less likely to implode, which will hurt China's economy with disastrous results.

There is also widespread public anger about property inflation and foreign investors who have been buying up Chinese condos and jacking up the prices. China's leaders are acutely aware of this and how its effecting the economy have decided they will not tolerate double digit percentages in property inflation and rampant speculation.

Property inflation went down to 6.4% in December from November’s 7.7%, but it wasn't that long ago that many Chinese cities were seeing inflation of 10% or more annually.

“The new measures are very strict. If property sales plunge, some property developers will definitely run out of cash,” said Shen Aiqing, a property analyst with GF Securities in Guangzhou.

What China is doing is also very risky. They are attempting to cool down the market, not bring it to a complete halt. A sudden shortage in home buyers would do exactly what they feared, cause a collapse.