November’s property stats are in, and just look at that! Prices were up 5.7% year-on-year, extending from October’s rise of 3.9%, marking the sharpest rise in 16 months. Just consider Beijing. Citing figures from the China Index Institute, state media reported that average property prices hit US$2,563 per square meter in November, up 9.74% from the previous month, and demand is still going strong as supply tries to play catch-up.
Unless something goes seriously wrong – a US-style sub-prime mortgage disaster – property prices globally do tend to rise, not fall, particularly in administrative capitals (Beijing), financial capitals (Shanghai) and prime industrialized cities with close or immediate access to external markets (Guangzhou, Shenzhen). These simple facts should come as no surprise.
Here are a couple of other facts from the November figures: Real estate investment rose 17.8% year-on-year to US$458.5 billion over the January-November period, against 16.6% growth for the January-October period.
Construction starts were up 15.8% between January and November to 976 million square meters, and a total of 752 million square meters of floor space were sold during this period, up 53% from last year.
These figures are all really quite impressive (if a wee bit alarming – but I'll save that for another time), but to quote Wang Tao, China economist at UBS, why shouldn't they be? Interest rates are low, and mortgage rates continue to enjoy a 30% discount off the benchmark lending rate.
More importantly: "the expectations of continued rising property prices have been validated by the decade-long property market and now supported by the abundance of liquidity. Despite the recent removal of short-term business tax exemptions on property transaction, overall taxation related to property purchase and ownership is low, especially compared to investment in real business activity."
Tao notes that compared with many other countries, China has no property tax, no capital gains tax, and only a 5% business tax on rental income. Salary income is taxed up to a maximum of 45% and corporate profit tax is 25%.
"Such an incentive system could indeed help to fuel property investment by both households and small and medium-sized businesses."
I simply could not agree more: Buying property is a logical decision. For anybody who has seen pensions or savings tied up in mutual funds evaporate with the crash of the global economy, four walls and a roof are assets that you can live in, borrow off, and, despite the 60-year leasehold limits (of which there is an ongoing discussion to review) on residential property, you can leave to your children.
Of course prices go up. It's how far they go that is worrying officials in Beijing. How far should policy control low-end housing prices, and how far can we trust the market to control high-end housing?