No Pain No Gain: Regulating the Property Market in the Long-term

In the wake of the central government issuing ten policies to curb China's speculative property market, local governments are following suit; some are taking an even tougher position. It is still too early to predict whether the policies will achieve their predicted results and bring down housing prices.

However, without a doubt, it is time to regulate the property market. Aside from affecting people's livelihood and deepening social inequality, the current inflated housing prices have produced large housing bubbles in some key cities. Statistics show that the ratio of housing prices to income in China is over 15; in Shanghai, Beijing and Guangzhou the ratio is over 50. Although the central government has given many warnings and has made attempts to control housing prices, they continue to rise. Once the bubble bursts the very system of China's economy will be at risk.

Since 2003 when the Chinese economy entered a new period of growth, the central government has tried three times to regulate and control the property market, giving up halfway every time. At the end of 2008, to deal with the financial crisis, it propped up the property market by flooding banks with liquidity and manufactured today's property bubble. Though the reasons are complicated, what cannot be neglected is the fact that real estate industry investment drives a large quantity of upstream and downstream sectors and thus is a powerful pillar of GDP. During the past year, the property industry has resuscitated the economy, contributing to the success of maintaining a GDP growth rate of 8 percent, and has caused the government to simultaneously have feel nervous about and have affection towards the property sector; thus they hesitate when trying to curb the industry.

However, the government is destined to eventually pay a heavy price for the property bubble. Many foreign "disaster seers" have predicted that the Chinese economy will slow or even collapse because China relies on its real estate sector to promote economic growth. Although it may be a bit of exaggeration, our current situation is similar to what happened in Japan. From 1970 to 1985, Japan's housing prices increased 16-fold. Today we have too many similarities with Japan in 1985: a loose monetary policy; the need to change to a domestic demand-driven economy; currency appreciation pressure; land playing a large role in creating the property bubble; an increasing pace of urbanization and a strong inflexible demand for property. 

The property bubble in Japan can serve as a lesson to the Chinese government. People in the property field widely believe that this time the new policy is for real. It not only increases the effective housing supply and cracks down on developers who intentionally keep properties off the market, but it also takes measures to curb speculation. For example, the down-payment and lending rate for non first time home buyers have been substantially increased; in Beijing, every family is only allowed to buy one new house and individuals who are not registered locally have to provide evidence proving they have been tax payers in Beijing for over a year.

The above administrative measures will curb investment in the real estate market and an adjustment in housing prices should be inevitable. But there will also be negative effects. For example, some families are prohibited from buying new houses even if they are not speculators; the special regulation toward non-registered residents is suspect of being discriminatory. If these are the short term grievances, then what will long term policy be like?

Housing is a commodity as well as a public good.Previously, relevant departments differentiated commercial housing and public housing, by granting them differential treatment. People were allowed to buy or sell commercial housing freely. If the government uses its authority to excessively micro-manage the market, they might cause the opposite of their desired result, causing a huge fluctuation in housing prices, affecting other industries and running counter to the government's original expectations.

We think administrative regulation and control measures of the property market should only be short-term policies cautiously implemented at a fixed time and place and promptly withdrawn. They should not be made long-term or generalized; this is the bottom line of all government regulation on behavior.

For long-term policies, the governments should take the initiative to solve the housing problems of people with mid or low incomes. The 2010 Government Work Report, states that the central government plans to invest 63.2 billion yuan in constructing public housing projects, a sum undoubtedly too small when compared with the target previously raised by the Ministry of Housing and Urban-rural Development to invest 900 billion yuan in three years. Even with such a small investment, the government needs to work with the other market players to make their plan a reality. Only by liberating people with mid and low incomes from the hardship of high housing prices will China's property market cease to be a target of seething popular discontent.

The irrational exuberance of China's property market is attributed not only to excessive liquidity but also to a lack of investment channels which has led to investment pouring into the property industry. Therefore, how to eliminate the risks associated with having a lone, powerful property sector and how to cultivate more investment channels deserves government investigation into how to formulate effective long-term policy.

This article was edited by Rose Scobie