How prop­erty mar­ket frenzy can be curbed

China Daily (USA) - - VIEW -

Hous­ing starts are ris­ing again, re­spond­ing to an ear­lier rise in hous­ing sales that also in­creased hous­ing prices. The re­newed en­thu­si­asm in real es­tate has been key in sup­port­ing GDP growth and heavy in­dus­try sec­tors such as steel.

But the re­cov­ery has been un­even, with signs of a price bub­ble emerg­ing in some, mostly large, cities while in­ven­to­ries re­main high in oth­ers. Prop­erty prices in tier-one cities and some tier-two cities have risen sharply since early 2015.

In Shen­zhen and Shang­hai, they were on av­er­age about 38 per­cent higher in Au­gust than a year ago— in Shen­zhen the yearon-year in­crease had even reached 67 per­cent ear­lier in 2016, be­fore the lo­cal gov­ern­ment took mea­sures to re­strict hous­ing pur­chases. Shang­hai has also taken such mea­sures, as did sev­eral other cities. But it seems that, in re­sponse to such re­stric­tions, the rally has spread to other cities close by. The rally has also spread to the land mar­ket, with prices at auc­tions break­ing newrecords.

At the same time, many thir­dand fourth-tier cities are still strug­gling to digest high in­ven­to­ries of un­sold hous­ing. In­deed, the de­mand-sup­ply sit­u­a­tion in most of the smaller cities re­mains very dif­fer­ent from that in the large ones, with many de­vel­op­ers hav­ing over-built with­out as­sess­ing real de­mand.

De­vel­op­ments in the tier-one cities tend to get the lime­light and can have spillover ef­fects. But since con­struc­tion and sales in the smaller cities make up the bulk of the na­tion­wide to­tal, the sit­u­a­tion there is more rep­re­sen­ta­tive for the over­all prop­erty sec­tor and thus also key for na­tion­wide pol­i­cy­mak­ing.

Macroe­co­nomic pol­icy eas­ing is an im­por­tant rea­son for the re­cov­ery in hous­ing sales since early 2015. In­ter­est rates were cut six times since mid-2014, and the re­serve re­quire­ment ra­tio five times. Also, early this year min­i­mum­down pay­ment re­quire­ments were cut na­tion­wide as the gov­ern­ment sought to en­cour­age mort­gage lend­ing to spur sales and re­duce the high un­sold hous­ing in­ven­to­ries. In­deed, res­i­den­tial mort­gage lend­ing has been ris­ing by about 30 per­cent on the year in re­cent months, ac­count­ing for the bulk of to­tal new­bank­ing lend­ing. And amid easy over­all liq­uid­ity con­di­tions, real es­tate lend­ing by other in­ter­me­di­aries has flour­ished. The frenzy in tier one-cities’ hous­ing mar­kets is in no small part a man­i­fes­ta­tion of China’s overly rapid credit growth pol­icy. As in other parts of the econ­omy, the un­sus­tain­ably rapid credit growth de­ployed to meet overly am­bi­tious GDP growth tar­gets is lead­ing to mis­al­lo­ca­tion and fi­nan­cial risks in the prop­erty mar­ket. While over­all credit growth should be reined in, spe­cific na­tion­wide steps to con­tain the hous­ing mar­ket frenzy and tame ex­ces­sive fi­nan­cial in­flows into the prop­erty sec­tor can be taken as well, in­clud­ing higher min­i­mum down pay­ments for mort­gages. It also makes sense for lo­cal gov­ern­ments to tighten de­mand in the over­heated cities by means of fur­ther city-spe­cific hous­ing pur­chase re­stric­tions, as well as to in­crease land sup­ply. Pol­i­cy­mak­ers do not need to worry too much about such mea­sures hav­ing ex­ces­sive im­pact on the real econ­omy. The fact that loan-to-value ra­tios re­main mod­est, over­all, lim­its the risk of large num­bers of house­holds run­ning into trou­ble if hous­ing prices fall. More im­por­tantly, a rel­a­tively cau­tious at­ti­tude of de­vel­op­ers dur­ing the cur­rent sales re­cov­ery and sig­nif­i­cant de­stock­ing since early 2016 mean that con­struc­tion does not have to ad­just as much to a sales slow­down as in 2014. In cities still strug­gling with over­sup­ply of un­sold hous­ing, there is no magic bul­let. That in­ven­tory will have to come down or­gan­i­cally and mean­while it will weigh on real es­tate con­struc­tion. But mar­kets should be al­lowed to play a larger role in solv­ing over­sup­ply. One im­por­tant way is to tighten bud­get con­straints of weak prop­erty de­vel­op­ers and their ac­cess to fi­nance. In all, the pol­icy pre­scrip­tion for the hous­ing mar­ket looks a lot like that for the over­all econ­omy: rein in lend­ing and ex­cesses while pur­su­ing mar­ket-ori­ented struc­tural re­forms to re­duce ex­cess sup­ply. The au­thor is head of Asia eco­nomics at Ox­ford Eco­nomics.

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