Understanding Property Curbs

‘Property curbs’ is nowadays a very frequently heard term in wealth management space. Nations across Asia, such as China, Indonesia, Hong Kong and Singapore have implemented property curbs in the recent years. Property curbs can be defined as property policies set by the governments to curb excessive increase in property prices. Property curbs are also called as property tightening or cooling measures. The policies generally target the residential sector. An excessive increase in home prices can lead to property bubble and make housing unaffordable and out of reach for a wide section of population. When property bubble bursts, it generally has far reaching consequences on the economy. This is because the linkages between banking sector and property sector are usually strong, in the form of mortgage lending to home buyers and project lending or construction loans to developers.

Property tightening measures can be demand side measures or supply side measures. Demand side measures are targeted at decreasing speculative/investment demand, in order to soften the prices. Some of the measures include i) decreasing the availability of funding, ii) increasing the cost of loans, iii) increasing the down payment on loans, iv) rising taxes such as property tax or capital gains tax, and iv) tightening eligibility criteria for home purchase. Funding availability can be tightened by not providing loans/mortgages for second or third home purchases. Further, even if loans are sanctioned, the initial down payment can be higher and interest rates can be higher. For example, the minimum down payment on first home mortgage is 30{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} in China, while that on second home mortgage is 60{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} (70{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} in tier-1 cities such as Beijing). Capital gain tax hike impacts second-hand/secondary home market and controls speculative demand. An extreme form of curbs is to prevent a whole section of population from purchasing property. Non-locals (within a particular city or country) may be barred from buying property. Hong Kong in October 2012 levied a 15{823ee7c0eba0898fb29b07c380fe9d57eedb27ae7904b52342d0b3a1c98ef280} tax on property purchases made by foreigners. Supply side measures aim to increase the supply of homes in order to control price gains. Some of these measures are i) increasing land supply/availability for property development, ii) government developing affordable homes for lower income population, and iii) imposing hefty fine/penalty on land hoarding (keeping land idle for long time).

Whether property curbs are effective is the question. China introduced property curbs in 2010 and has been able to avoid a property market crash till now. Hong Kong implemented curbs in 2012, while Singapore and Indonesia imposed them in 2013. When price rise is due to shortage of land and housing, like in the case of Hong Kong, demand side policies may not be effective, unless they are stricter policies such as banning certain population from purchasing home. Compared to demand side measures, supply side measures take longer time to have any impact on the property markets. Property acts as an investment or storage of wealth, when household savings rate is high, deposit rates are low and there is a lack of investment channels. In such a scenario, measures tightening the mortgage market may not have a significant impact, as home buyers fund purchases out of their savings and do not depend on mortgages. Other measures such as allowing alternative investment options may divert investment away from property and contain investment demand.

Real estate asset class provides investment opportunities to investors. However, investors should consult financial advisors in order to better understand the regulatory environment in different markets, assess the various risks associated with them and invest accordingly.