New approach needed for property market bubble
Against a backdrop of strict home purchase restrictions, China’s real estate market appeared to reach a turning point in May. In the first five months of 2017, property investment in China grew 8.8 percent, compared with a 9.3 percent rise in January- April, according to data from the National Bureau of Statistics. Meanwhile, growth of new construction starts, measured by floor area, eased from an 11.1 percent rise in the first four months to 9.5 percent.
With housing prices in China’s first- and second- tier cities having soared over the last year, there have been concerns about a bubble in the domestic real estate market.
In my view, the reason why bubbles never actually burst in China’s property market is mainly because of its unique periodic pattern. In past cycles of China’s real estate market, housing prices first experienced a rapid increase, leading to severe policy control measures, which usually adjusted short- term supply and demand and changed expectations about rising prices. Later, economic growth boosted incomes, thus providing support for higher housing prices.
Behind the special pattern of property market bubbles is the country’s unprecedented high economic growth over the past three decades. For a long time, the Chinese economy enjoyed dividends from the reform and opening- up as well as economic globalization, with per capita income always maintaining doubledigit growth. Since 2013, per capita income growth slowed to less than 10 percent, staying at a relatively high level of 8 to 9 percent, which has still enabled the economic fundamentals to digest the housing market bubble and reduce the risk of a real estate crisis.
But China’s economy has entered a new normal period, and it could be difficult for income to maintain such high growth rates, and short- term structural unemployment is possible due to the economic transition. China has undergone painful structural adjustment and a period of digesting previous stimulus policies.
Recently, hous- ing prices in first- and secondtier cities surged more than ever, indicating that the market hasn’t fully anticipated the slowdown in income growth. On the contrary, considering the past history of rising housing prices, some people still believe that the Chinese property market is unique and that the government will implicitly protect it against the laws of economics. However, the latest property market bubble could pose risks for the whole economy. First of all, the overall rise in housing prices is worrying in a sense that it doesn’t have support either from optimistic economic expectations or a rapid increase in residents’ incomes. In the past, housing prices were always closely related to economic strength because robust economic performance lifted income expectations, pointing to increased demand for homes and boosting housing prices. But that’s not the case in the current Chinese economy. Despite a rebound in the second half of 2016, the economy is still expected to face much downward pressure in the second half of this year. Against such a backdrop, the thriving real estate market has gone beyond people’s expectations for their future income and the economy, and once the market turns bad, financial risks will increase. Second, panic and speculative purchases have increased economic vulnerability. Once expectations reverse, financial risk will worsen. Amid the frenzied home- purchasing sen- timent, any change in housing policy will lead to a strong market reaction.
As regards how to deal with the current real estate risk, I believe that China should avoid pricking the bubble. In 1989 and 1990, Japan’s central bank raised the benchmark interest rate from 2.5 percent to 6 percent, pricking the housing market bubble intentionally. In contrast, the Chinese government has always taken administrative measures to contain housing price rises so as to prevent the bubble from bursting, which is why there has been no crisis in the domestic property market.
The key to reducing China’s property market risk is to reverse the expectations behind the boom in home purchasing by taking such measures as increasing land supply, guiding the reasonable allocation of credit, formulating real estate policies based on local conditions and preventing excessive amounts of capital from entering the property market. In the long run, there is no shortcut for reform. It is risky to help companies deleverage by adding to residents’ leverage level. Effectively pushing forward with structural reform is the fundamental way to address the problem. As it has become increasingly ineffective to control the bubble by issuing short- term purchase restrictions, a long- term mechanism for more supply- side reforms, like land reform, household registration reform and property tax reform, is urgently needed.