‘Property ropes’ is nowadays a term that is heard very frequently in the wealth management space. Asian nations such as China, Indonesia, Hong Kong and Singapore have implemented property restrictions in recent years. Property restrictions can be defined as property policies put in place by governments to curb the excessive rise in property prices. Property curbs are also called property hardening or cooling measures. Policies generally target the residential sector. An excessive increase in house prices can cause a housing bubble and make housing unaffordable and out of reach for a large section of the population. When the housing bubble bursts, it usually has far-reaching consequences on the economy. This is because the links between the banking sector and the real estate sector are often strong, in the form of mortgage loans for home buyers and project loans or construction loans for real estate developers.
Property adjustment measures can be demand-side measures or supply-side measures. Demand-side measures are aimed at decreasing speculative/investment demand, in order to smooth prices. Some of the measures include i) decreasing the availability of financing, ii) increasing the cost of loans, iii) increasing the down payment on loans, iv) increasing taxes, such as property tax or income tax of capital, and iv) toughen the eligibility criteria for home purchase. The availability of funds may be restricted by not providing loans/mortgages for the purchase of a second or third home. Also, even if the loans are sanctioned, the down payment may be higher and the interest rates may be higher. For example, the minimum down payment on a first home mortgage is 30% in China, while the minimum down payment on a second home mortgage is 60% (70% in Tier 1 cities like Beijing). The capital gains tax increase affects the secondary/resale housing market and controls speculative demand. An extreme form of restrictions is to prevent an entire section of the population from buying property. Non-locals (within a particular city or country) may be prohibited from purchasing property. Hong Kong in October 2012 imposed a 15% tax on property purchases made by foreigners. Supply-side measures aim to increase the supply of homes to control price gains. Some of these measures are i) increasing the supply/availability of land for real estate development, ii) the development of affordable housing by the government for the low-income population, and iii) the imposition of heavy fines/penalties for the land grabbing (keeping land idle for a long time).
The question is whether the property restrictions are effective. China introduced property restrictions in 2010 and has been able to avoid a housing market slump so far. Hong Kong implemented restrictions in 2012, while Singapore and Indonesia imposed them in 2013. When price increases are due to land and housing shortages, as in the case of Hong Kong, demand-side policies may not be effective, unless they are stricter policies such as prohibiting a certain population from buying a home. Compared to demand-side measures, supply-side measures take longer to have any impact on real estate markets. Property acts as an investment or store of wealth, when the household savings rate is high, deposit rates are low, and there is a lack of investment channels. In such a scenario, the mortgage market adjustment measures may not have a significant impact, since home buyers finance their purchases with their savings and do not depend on mortgages. Other measures, such as allowing alternative investment options, can divert investment away from property and curb investment demand.
The real estate asset class offers investment opportunities to investors. However, investors should consult financial advisors to better understand the regulatory environment in different markets, assess the various risks associated with them, and invest accordingly.
