Worries over China's Property Market Overshadow Economic Prospects

Worries about a slowdown in China's property market are threatening to overshadow the country's economic prospects, according to the Organisation for Economic Cooperation and Development.

The report from the OECD stated that while the failure of small developers wouldn't pose a significant problem, this wouldn't be the case with larger developers who could put bank lending at risk. It identified a key risk as being an "overly quick liquidation of unsold property."

China is expected to see growth of 8.5% next year, even though exports will be affected by weakened demand and a decline in the nation's overall competitiveness.

According to the OECD the economy could be helped through government housing projects which would support the construction and moderate the effects of inflation, possibly allowing the government to cut interest rates from the middle of next year.

The vice premier of China, Li Keqiang has already announced the property market is entering a critical stage but feels restrictions on transactions should be maintained even though sales are declining. Latest figures show October sales fell by 25% compared to September and prices fell in 33 out of the 70 cities monitored.

The government has placed restrictions on mortgages and home purchases in around 40 cities and is also aiming to build 10 million affordable homes to boost supply. Some analysts are already predicting that falling property prices in cities such as Shanghai and Beijing could force the government to relinquish some of its hold on the property market. UBS is forecasting property prices will drop by between 10% and 15% in first tier cities in 2012 and by 5% to 10% in other cities.

Chinese and Taiwanese Seek Japanese Bargains

One of the biggest property brokerage firms in Taiwan is helping Taiwanese and Chinese buyers find property investments in Japan, as the government restrictions are making it increasingly difficult to buy in their home markets. Japan is proving attractive due to low interest rates, and the high rental yields can be double those available in their home countries.

Property prices in Japan are currently low, while the Chinese and Taiwanese governments are currently trying to suppress property prices are due to their rapid increase over the last couple of years. China has already raised interest rates five times since October, has limited property purchases in Beijing and Shanghai and is now looking towards curbing the growth of property prices in smaller cities.

Taiwan has increased the cost of borrowing for five straight quarters, and has also introduced a new tax on luxury properties sold within two years of purchase. It's been estimated that this action will lower transaction volumes by 10% this year as the market is no longer so attractive to speculators.

The property market in Japan is already showing signs of recovery after the recent earthquake and tsunami. New housing starts increased by 6.4% in May compared to a year earlier, and a $25.5 billion disaster package has just been approved for rebuilding after the earthquake. Rental yields in the country are around 5% to 6%, which is double that of China or Taiwan, as property prices here haven't increased as substantially as other Asian markets. Chinese investors in particular are increasingly looking for other markets, as they prefer to relocate assets offshore.

Chinese government is successful at avoiding property bubble

It looks as if the Chinese government has been successful at avoiding a property bubble as prices during May fell in 23 out of the 70 cities surveyed, up from 16 in April.

Prices of existing homes in Beijing fell by 0.2% from April while property in Shanghai registered a 0.2% increase. Prices of new homes increased in 67 out of the 70 cities. The Chinese authorities are determined to prevent a bubble, and on June 14 the authorities ordered banks to hold more money as reserves, as it continues to fight inflation.

The government measures work better on existing homes as they restrain purchasing power, whereas developers of new properties are in no rush to slash prices, and are watching to see how government policies will develop.

The prices of new homes in the larger cities such as Beijing slowed last month, as much of the government's efforts have been focused on the largest urban areas. However a total of 29 cities posted increases of more than 5%, even though this is down from 33 cities in April.

Prices of new homes in Beijing have increased by 2.1% while Shanghai homes increased by 1.4%. The smaller cities such as Lanzhou, Mudanjiang and Urumqi all posted much larger gains of at least 7.7%.

Standard & Poor cut Chinese developers outlook from stable to negative on June 15, and it's likely that property sales will slow as the government policies really start to kick in. The credit rating company thinks that as prices may be 10% lower in the next 12 months.

Chinese banks increase reserve requirements

Chinese banks have increased their reserve requirements in order to restrict the flow of cash and cool inflation, and the central bank governor Zhou Xiaochuan has said that monetary tightening will continue for some time.

The reserve ratios are due to rise half a point pushing the requirement to 20.5% for the biggest lenders and this latest move comes just two weeks after interest rate increases. It's hoped these measures will prevent banks from lending aggressively in the next month.

It also seems likely that another interest rate increase may come as soon as next month after figures showed inflation accelerating at its fastest pace since 2008.

The policymakers in China may also consider allowing the Yuan to appreciate more quickly in order to reduce the cost of imported products including oil.

The US in particular thinks the Chinese currency is undervalued and there are expectations that it will rise about 2.3% during the next 12 months. The US Treasury secretary Timothy F.

Geithner has said that a stronger currency would help to counter inflation within China and would also help to reduce economic imbalances that have contributed to the global financial crisis. The Yuan has increased in value by 4.5% against the dollar since last June, which was when the Chinese scrapped their policy of keeping the currency unchanged against the dollar.

The Yuan is close to becoming included in the International Monetary Fund's Special Drawing Rights basket, and this should help China overcome inflation. However some officials feel that the SDR basket should be broadened to not only include China but also the currencies of Russia, India, South Africa and Brazil.

China aims for quality, not quantity GDP growth

For the last five years the economy in China has grown around 11%, but now the Chinese leadership has stated that its GDP target for this year is 7%. It's hoped that lowering GDP growth expectations for help keep inflation at 4% or less. This may be tough as the price of raw materials and resources is rising rapidly, and it also remain to be seen if this growth rate of 7% is realistic, as a growth rate of 8% has been set for the last seven years and has always been exceeded.

The leadership is thought to have set this target not only to try to cool the economy but also to maintain a balanced economy as it is aiming more towards domestic led consumer growth rather than cheap exports, investment and heavy manufacturing. It is hoped this policy will enable a more even distribution of income growth and a lower balance of payments current account surplus, and has raised income expectation for both rural and urban citizens to more than 7%, up from 5%.

The Chinese leadership is determined to raise the living standards for those citizens on low incomes. A plan is already underway to build 36 million affordable homes within the next five years. This may seem an extraordinary number until you consider that the population of China is 1.3 billion. Beijing is due to continue spending on upgrading the infrastructure and social services for low income families. China also needs to address its shortage of energy, especially as plans may be underway to relax the one child per family ruling.

Turkish Property a Hands Down Winner in Buyer Confidence War

Some of you will likely have seen our latest article to be published by Buy Association, in which we lay out why no country can match Turkey on its combination of strong growth and high security and confidence, and popularity (buzz).

Sure, we have Brazil, which is also generating massive buzz, and growing massively, and China, which, is of course the fastest growing economy in the world. And while the fight is a good one on which country will see the fastest growth in rents and property prices, in terms of buyer confidence, Turkey is a hands-down winner before the gate opens.

Before the credit crunch, confidence and stability paled into insignificance as the majority of buyers chased the biggest gains to Dubai as well as far flung and exotic emerging markets, hanging the delays of due diligence to "get in quick" and be the "early bird" that catches the worm. But we all know how so many of them paid for their folly. The buyers to emerge from this are obviously paying much more attention to security, stability and only buying where they feel most confident and safe.

Not many people are inspired by a feeling of safety when hearing the word China. Its communist dictatorship government, along with its abysmal record on human rights abuses, oppression and all manner of corruption, are a massive hindrance to buyer confidence. Not to mention fear that your property could be seized and even you arrested if you do something against someone in power's interests.

For a majority-Muslim nation, the determination of Turkey's secularism is surprising. Since the coup of 1980, the country has reformed into a fully democratic secular nation. The performance of the current AK party and its history of successful reform is a great booster of confidence among foreign investors.

Brazil’s problem is its massive crime rate. Its murder rate of four times that of America puts a great dent in foreign buyers' confidence.

Turkey’s Islamic based law system is harsh, and as a result the crime rate kept low.

In fact, unemployment is Turkey’s main hindrance and even it is currently falling. Still, compared to the problems of China and Brazil, Turkey’s has a minimal impact on confidence.