Understanding character Curbs
‘character curbs’ is nowadays a very frequently heard term in wealth management space. Nations across Asia, such as China, Indonesia, Hong Kong and Singapore have implemented character curbs in the recent years. character curbs can be defined as character policies set by the governments to curb excessive increase in character prices. character curbs are also called as character tightening or cooling measures. The policies generally target the residential sector. An excessive increase in home prices can rule to character bubble and make housing unaffordable and out of reach for a wide section of population. When character bubble bursts, it generally has far reaching consequences on the economy. This is because the linkages between banking sector and character sector are usually strong, in the form of mortgage lending to home buyers and project lending or construction loans to developers.
character tightening measures can be need side measures or supply side measures. need side measures are targeted at decreasing speculative/investment need, in order to soften the prices. Some of the measures include i) decreasing the availability of funding, ii) increasing the cost of loans, iii) increasing the down payment on loans, iv) rising taxes such as character tax or capital gains tax, and iv) tightening eligibility criteria for home buy. Funding availability can be tightened by not providing loans/mortgages for second or third home purchases. Further, already if loans are sanctioned, the initial down payment can be higher and interest rates can be higher. For example, the minimum down payment on first home mortgage is 30% in China, while that on second home mortgage is 60% (70% in tier-1 cities such as Beijing). Capital gain tax hike impacts second-hand/secondary home market and controls speculative need. An extreme form of curbs is to prevent a whole section of population from purchasing character. Non-locals (within a particular city or country) may be barred from buying character. Hong Kong in October 2012 levied a 15% tax on character 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/availability for character development, ii) government developing affordable homes for lower income population, and iii) imposing hefty fine/penalty on land hoarding (keeping land idle for long time).
Whether character curbs are effective is the question. China introduced character curbs in 2010 and has been able to avoid a character market crash till now. Hong Kong implemented curbs in 2012, while Singapore and Indonesia imposed them in 2013. When price rise is due to shortage of land and housing, like in the case of Hong Kong, need side policies may not be effective, unless they are stricter policies such as banning certain population from purchasing home. Compared to need side measures, supply side measures take longer time to have any impact on the character markets. character acts as an investment or storage of wealth, when household savings rate is high, place rates are low and there is a without of investment channels. In such a scenario, measures tightening the mortgage market may not have a meaningful impact, as home buyers fund purchases out of their savings and do not depend on mortgages. Other measures such as allowing different investment options may divert investment away from character and contain investment need.
Real estate asset class provides investment opportunities to investors. However, investors should consult financial advisors in order to better understand the regulatory ecosystem in different markets, estimate the various risks associated with them and invest consequently.