Saturday, January 20, 2007
More Thoughts on Land VAT
In a free housing market when demand drives up property prices, supply will pile in and eventually catch up (as land development takes time) with the demand and the market will resume to a normal but higher level (assume low inflation). Just like when the stock market is really heated we'll see all kinds of IPOs and placings to absorb the buying power, but only happening in a much quicker fashion. Sometimes overshooting occurs in both ways and with a little human intervention we have booms & busts.
China housing demand is on an upward slope, but no one quite knows whether the slope is a gentle or steep one. As the government has allowed some part of the population to come ahead of others (e.g. urban and coastal cities), a surge in demand for quality housing is natural progression. Afterall improvement in quality of living is what drives people forward. It's also natural that developers ignore the mass market, i.e. low income families who have little spending power. This together with the lack of a formal public housing programme by the government has created a vacuum in the property market, a cause for social unrest or 'deep level contradiction'. But China's problem is more complicated.
Another contributing factor is the slow RMB appreciation (it actually depreciated against most currencies last year!). It has attracted a massive sum of foreign speculative money in stocks and properties. Exchange reserves continue to pile up everyday and consumption keeps falling behind. Local citizens and companies have limited access to foreign markets due to capital control. Investments in resources and fixed assets are no longer welcome. So where do these monies go? Stocks and properties again! Unless RMB is appreciated sufficiently this excess liquidity will not go away and neither will property speculators. I think Jim Rogers once said he has found the surest bet to be those against central bankers who try to act against the market. Many are following his advice now.
My question once again is: why deter property development when you know demand is going to stay strong in the long run? I think the outcome will be one of the following scenario.
(1) The government has analysed enough data to conclude that future supply is gonna outstrip demand by so much that a severe crash will be a certainty, like we HK and our neighbour Japan experienced. Therefore it properly introduces drastic measures to smooth out the 'boom & bust' pattern and the society is saved from any adverse impact.
(2) The government has analysed enough data but under-estimated future demand for housing or RMB, and by controlling supply now, future property prices will escalate further and the eventual bust will be worse.
(3) The government has analysed enough data to properly estimate future demand but by intervening the supply side too much, property prices will still rise in the future and will follow a similar path as in scenario 1.
What's your guess? As I don't believe in central planning I think either (2) or (3) is more likely. So I'm sticking to property plays, selectively of course! Profits will be lower because of the new tax. Consolidation will accelerate and eliminate less efficient players. However I don't see the general direction of the market will be altered. As for impact on individual companies, it's too early to tell before we see how the local government and bureau actually enforce the guidelines. Are they gonna scrutinize every single property projects in China sold over the last 10 years? Or will it work on a self-declaration basis like how the VAT investigation was handled before? No one has an answer right now. But I do know there's no way the governement can turn private developers into providing low-income housing projects with land VAT. If it tries really hard it'll more likely find everybody is out and itself alone in the housing market!
I have no clue how the hyper valuation of most land developers came from at the first place, therefore I can't comment how they will be affected now. In my view they are already too expensive, with or without the land VAT!
China housing demand is on an upward slope, but no one quite knows whether the slope is a gentle or steep one. As the government has allowed some part of the population to come ahead of others (e.g. urban and coastal cities), a surge in demand for quality housing is natural progression. Afterall improvement in quality of living is what drives people forward. It's also natural that developers ignore the mass market, i.e. low income families who have little spending power. This together with the lack of a formal public housing programme by the government has created a vacuum in the property market, a cause for social unrest or 'deep level contradiction'. But China's problem is more complicated.
Another contributing factor is the slow RMB appreciation (it actually depreciated against most currencies last year!). It has attracted a massive sum of foreign speculative money in stocks and properties. Exchange reserves continue to pile up everyday and consumption keeps falling behind. Local citizens and companies have limited access to foreign markets due to capital control. Investments in resources and fixed assets are no longer welcome. So where do these monies go? Stocks and properties again! Unless RMB is appreciated sufficiently this excess liquidity will not go away and neither will property speculators. I think Jim Rogers once said he has found the surest bet to be those against central bankers who try to act against the market. Many are following his advice now.
My question once again is: why deter property development when you know demand is going to stay strong in the long run? I think the outcome will be one of the following scenario.
(1) The government has analysed enough data to conclude that future supply is gonna outstrip demand by so much that a severe crash will be a certainty, like we HK and our neighbour Japan experienced. Therefore it properly introduces drastic measures to smooth out the 'boom & bust' pattern and the society is saved from any adverse impact.
(2) The government has analysed enough data but under-estimated future demand for housing or RMB, and by controlling supply now, future property prices will escalate further and the eventual bust will be worse.
(3) The government has analysed enough data to properly estimate future demand but by intervening the supply side too much, property prices will still rise in the future and will follow a similar path as in scenario 1.
What's your guess? As I don't believe in central planning I think either (2) or (3) is more likely. So I'm sticking to property plays, selectively of course! Profits will be lower because of the new tax. Consolidation will accelerate and eliminate less efficient players. However I don't see the general direction of the market will be altered. As for impact on individual companies, it's too early to tell before we see how the local government and bureau actually enforce the guidelines. Are they gonna scrutinize every single property projects in China sold over the last 10 years? Or will it work on a self-declaration basis like how the VAT investigation was handled before? No one has an answer right now. But I do know there's no way the governement can turn private developers into providing low-income housing projects with land VAT. If it tries really hard it'll more likely find everybody is out and itself alone in the housing market!
I have no clue how the hyper valuation of most land developers came from at the first place, therefore I can't comment how they will be affected now. In my view they are already too expensive, with or without the land VAT!
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