The Case For Avoiding U.S. Stocks And Buying Asia Instead Understanding Property Curbs

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Understanding Property Curbs

The term “property control” is very common today in the field of wealth management. Countries across Asia, such as China, Indonesia, Hong Kong and Singapore, have imposed property restrictions in recent years. Real estate containment can be defined as property policies established by governments to curb excessive growth in real estate prices. Property restrictions are also called hardening or cooling measures. The policy usually targets the housing sector. Excessive growth in housing prices can lead to a real estate bubble and make housing unaffordable and unaffordable for the general population. When a bubble bursts, it usually has far-reaching economic consequences. This is because the links between the banking sector and the real estate sector are usually strong in the form of mortgage lending to home buyers and project or construction lending to developers.

Property tightening measures can be demand-side measures or supply-side measures. Demand-side measures are aimed at reducing speculative/investment demand in order to moderate prices. Some of the measures include i) reducing the availability of finance, ii) increasing the cost of loans, iii) increasing the down payment on loans, iv) increasing taxes such as property tax or capital gains tax, and iv) tightening eligibility criteria for home purchase. The availability of financing can be reduced by not providing a loan/mortgage 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 for a first home mortgage is 30% in China, while a second home mortgage is 60% (70% in tier 1 cities like Beijing). The increase in capital gains tax affects the used/secondary housing market and controls speculative demand. The extreme form of deterrence is the prevention of the acquisition of property by the entire population. Non-local residents (within a certain city or country) may be prohibited from buying real estate. In October 2012, Hong Kong introduced a 15% tax on the purchase of real estate by foreigners. Supply-side measures aim to increase the supply of homes to control rising prices. Some of these measures are: i) increasing land supply/affordability for real estate development, ii) government building affordable homes for low-income populations, and iii) imposing large fines/penalties for land hoarding (keeping land idle for long periods of time ).

The question is whether ownership restrictions are effective. China imposed restrictions on real estate in 2010 and has so far been able to avoid a real estate market crash. Hong Kong introduced restrictions in 2012, while Singapore and Indonesia introduced them in 2013. When rising prices are driven by a shortage of land and housing, as in the case of Hong Kong, demand-side policies may be ineffective, unless they are harsher policies such as prohibiting certain groups of the population from purchasing housing. Compared to demand-side measures, supply-side measures take longer to affect real estate markets. Real estate acts as an investment or store of wealth when household savings rates are high, deposit rates are low, and investment channels are absent. In such a case, measures to tighten the mortgage market may not have a significant impact, as home buyers are financing purchases from their savings and are not dependent on mortgages. Other measures, such as allowing alternative investment options, may divert investment away from property and curb investment demand.

The real estate asset class provides investors with investment opportunities. However, investors should consult their financial advisors to better understand the regulatory environment in different markets, assess the various risks involved and invest accordingly.

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