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Understanding Property Curbs

‘Property curbs’ is nowadays a very oft detected term in wealth direction space. Nations crosswise Asia, such as China, Indonesia, Hong Kong and Singapore have enforced 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 human activity sphere. An excessive increase in home prices can lead to property bubble and make housing unlow-priced and out of reach for a wide section of universe. When property bubble bursts, it generally has far reaching consequences on the economy. This is because the linkages between banking sphere and property sphere are commonly 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 let in i) decreasing the accessibility of funding, ii) increasing the cost of loans, iii) increasing the deposit on loans, iv) rising taxes such as land tax or capital gains tax, and iv) tightening eligibility criteria for home purchase. Funding accessibility can be demanding by not providing loans/mortgages for second or third home purchases. Further, even if loans are sanctioned, the first deposit can be higher and interest rates can be higher. For example, the minimum deposit on first home mortgage is 30% in China, patc that on second home mortgage is 60% (70% in tier-1 cities such as Beijing). Capital gain tax-increase impacts second-hand/secondary home market and controls speculative demand. An extreme form of curbs is to prevent a whole section of universe from buying property. Non-locals (within a particular city or country) may be barred from buying property. Hong Kong in October 2012 levied a 15% 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/accessibility for property development, ii) government developing low-priced homes for lower income universe, and iii) imposing hefty fine/penalty ashore billboard (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 enforced curbs in 2012, patc Singapore and Indonesia obligatory them in 2013. When price rise is ascribable 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 ban certain universe from buying 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 home nest egg 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 nest egg 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 plus class provides investment opportunities to investors. However, investors should consult financial advisors in order to better understand the restrictive environment in different markets, assess the various risks associated with them and invest accordingly.

Understanding Property Curbs

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