Today, ‘property restrictions’ is 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 excessive rise in property prices. Property curbs are also called property hardening or cooling measures. Policies generally target the residential sector. An excessive rise in house prices can cause a housing bubble and make housing unaffordable and out of reach for a large segment 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 to developers.
Property tightening measures can be either demand-side measures or supply-side measures. Demand-side measures aim to decrease speculative / investment demand, in order to smooth prices. Some of the measures include i) decrease the availability of financing, ii) increase the cost of loans, iii) increase the down payment on loans, iv) increase taxes, such as property tax or income tax. capital, and iv) toughen the eligibility criteria for home purchase. The availability of funds can be restricted by not granting loans / mortgages for the purchase of a second or third home. Also, even if the loans are sanctioned, the down payment can be higher and interest rates can be higher. For example, the minimum down payment for a first home mortgage is 30% in China, while that for a second home mortgage is 60% (70% in Tier 1 cities like Beijing). The capital gains tax increase affects the second-hand / secondary housing market and controls speculative demand. An extreme form of restriction is to prevent an entire part of the population from buying a property. Non-residents (within a particular city or country) may be prohibited from purchasing a 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 increases. Some of these measures are i) increasing the supply / availability of land for property development, ii) the government developing affordable housing for the low-income population, and iii) imposing heavy fines / fines for land grabbing (keeping the land inactive for a long time).
The question is whether the property restrictions are effective. China introduced housing restrictions in 2010 and has been able to avoid a housing market crash 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 appropriate. effective, unless they are strict 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 saving rate is high, deposit rates are low, and there is a lack of investment channels. In such a scenario, measures that tighten the mortgage market may not have a significant impact, as home buyers finance purchases with their savings and are not dependent on mortgages. Other measures, such as allowing alternative investment options, can divert investment from the property and contain investment demand.
The real estate asset class offers investment opportunities to investors. However, investors should consult financial advisers to better understand the regulatory environment in different markets, assess the various risks associated with them, and invest accordingly.