Opinion
Blame the property boom on capital
By Fulong Wu (China Daily)
Updated: 2010-03-30 13:09
 |
Large Medium Small |
In 2007, there was a boom, and the central government tightened real estate policies and squeezed the bubble. That winter was a hard time for most property developers. But the global financial crisis, which started suddenly in mid-2008, rescued them. The fiscal policy turned from being tight to positive. Although it was intended to save the export-oriented manufacturing industries that were hit hard by the global downturn, the shift threw a lifeline to property developers. That helped them regain their confidence.
Just like in the days after the Asian financial crisis, housing development was picked as a major driver in late 2008 to boost domestic demand. Fixed assets were flooded by investment with relaxed credit. And though the National Development and Reform Commission has vehemently denied doubts over capital inflow into the property market, the 4-trillion-yuan ($586 billion) stimulus package may have had direct or indirect implications on the real estate sector.
International "hot money" flowed into China's assets market in the hope that the yuan would be revaluated. Institutional investors always expect to gain from rising property prices and/or currency revaluation. The property boom and the panic over "impending" inflation made the property market an attractive investment for the middle class to preserve its assets.
But when the middle class starts buying into an overheated property market, it is time for institutional investors to recede. Perhaps now is that time - except for reckless SOEs.
Rental yield in China is low, and does not justify buying a house to rent it out. We do not see the spread of "buy-to-let" in China. In fact, property owners don't rent out their second and/or third homes resulting in a high vacancy rate. Investment in property is made mainly to make profit from an increase in value.
That's why any change in the realty market would require the cooperation of local governments that are dependent on land revenue. Under a devolved tax-sharing system, local governments are responsible for a wide range of local expenditure and rely on tax rebate from the central government. The gap between revenue and expenditure is filled by "entrepreneurial governance", including transfer of land-use rights. So if the property bubble bursts, it would certainly send the heavily-indebted local governments into a financial tizzy.
|
||||
In the short term, one measure would be to ensure a sound housing finance system, with robust mortgage check and higher down payment. More stringent regulations would include reducing the liquidity of assets.
In the long term, a more socially oriented housing policy may calm people's panicked nerves over housing shortage and lower expectations for asset appreciation. Innovative approaches can be adopted to expand social and commercial rentals. For example, instead of demolishing urban villages to convert them into "commodity housing" estates, governments can take in situ redevelopment measures, because progressive housing renewal and spontaneous development can provide low-cost housing for migrant workers as well as low-income urban families.
After all, it is not housing demand that is driving up property prices, it is capital.
The author is professor and director of Urban China Research Center at Cardiff University, UK
