Regulation vs. Speculation

18 Apr

China is taking steps to cool its real estate market, but will they work?

The changes

At the end of last week China raised mortgage rates, and the proportion of down payment for some home purchases.  The cabinet said that “more forceful steps” are needed to reduce speculation on the back of real estate prices rising at a record pace.

The new rules stipulate that down payments for second homes must be at least 50% (up from 40%), and that mortgage rates cannot be less that 110% of benchmark interest rates.  In addition, banks are being encouraged to raise the ratios and rates for third home purchases by “a broad margin”

There is speculation that the Government will soon add a property tax in a bid to control price increases.

Will the regulation work?

These changes have been largely welcomed by pundits, nonetheless when speculation and regulation meet there are one of two outcomes:

  1. The market continues its climb
  2. The regulation is so strong as to precipitate a collapse!

Often, initial regulatory changes lead to outcome 1, which in turn leads to a stronger regulations and eventually outcome 2. Why should it be any different this time?

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