Nowadays the term “property restrictions” has become a very popular term in the field of wealth management. Countries across Asia, such as China, Indonesia, Hong Kong and Singapore have implemented property restrictions in recent years. Property restrictions can be defined as the property policies put in place by governments to curb excessive increase in real estate prices. Property restrictions are also called property tightening or cooling measures. The policies generally target the residential sector. An excessive increase in home prices can lead to a property bubble and make the cost of housing too expensive and out of reach for a wide section of the population. When the property bubble bursts, it generally has far-reaching consequences for the economy. 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 lending or construction loans to developers.
Proprietary tightening measures can be demand-side measures or supply-side measures. Demand-side measures aim at reducing speculative/investment demand, in order to moderate prices. Some of the measures include: 1) reducing the availability of financing, 2) increasing the cost of loans, 3) increasing the down payment on loans, 4) increasing taxes such as a property tax or capital gains tax, and 4) tightening eligibility criteria for a home purchase. The availability of financing can be tightened by not providing loans/mortgages for the purchase of a second or third home. Furthermore, even if loans are sanctioned, the down payment can be higher and the interest rates can be higher. For example, the minimum down payment on a first home mortgage is 30% in China, while the minimum down payment on a home mortgage is 60% (70% in first-tier cities like Beijing). The increase in capital gains tax affects the domestic used/secondary market and controls the speculative demand. One form of extreme restriction is to prevent an entire section of the population from buying real estate. Non-local residents (within a particular city or country) may be prohibited from purchasing real estate. In October 2012, Hong Kong imposed a 15% tax on real estate 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: 1) increasing land supply/availability for real estate development, 2) government developing affordable homes for low-income residents, and 3) imposing a heavy fine/penalty for land hoarding (keeping land idle for too long).
The question is whether property restrictions are effective. China introduced real estate restrictions in 2010 and has avoided a real estate market crash so far. Hong Kong implemented restrictions in 2012, while Singapore and Indonesia imposed them in 2013. When price hikes are due to a shortage of land and housing, as in Hong Kong, demand-side policies may not be effective, unless more stringent policies such as blocking some residents of 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 storage 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, mortgage market tightening measures may not have much effect, as homebuyers finance their purchases with their savings and do not rely on mortgages. Other measures such as allowing alternative investment options may divert investment away from property and contain investment demand.
The real estate asset class provides investment opportunities for investors. However, investors should consult Financial advisors In order to better understand the regulatory environment in different markets, assess the various risks associated with them and invest accordingly.