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Opinion: House pre-sale ban reconsidered
Is this a replay of the drama staged two years ago? Memories are fresh of the time the real estate sector managed to sabotage the central bank's efforts to check breakneck expansion of housing loans with high-handed measures in 2003. At that time the central bank expressed concern about the possible consequences of excessive growth in housing prices and investment. But the episode ended with a document issued by the central government with steps taken to further develop the industry. That document is believed to be largely the brainchild of the Ministry of Construction. In retrospect, it can be concluded that a rare chance to choke off the so-called "house price bubble" was missed. Housing prices had already climbed considerably by that time in some regions, but it is only in the past two years that they have really zoomed up across the country. Average real estate prices in China rose by 14.4 per cent in 2004 over the previous year and by 12.5 per cent in the first quarter of 2005. Had an early, tight grip been put on house prices, the property sector would have been able to undergo further strong and sustainable growth while serving as a key propeller of the national economy. Today, inflated prices have inflamed public anxiety and anger because they far outstrip the limits of average incomes. Increasing speculation in the property market is heightening domestic banks' exposure to risky loans. This chaos eventually drove policy-makers to slam on the brakes. The central bank's latest frank assessment of the risks from property price inflation is a belated but nevertheless useful warning of the severity of the matter. But a sober judgement of the problem does not guarantee a workable solution. Forward sales of unfinished houses have indeed given rise to many complaints about quality once home buyers get the keys to their investments. In the worst cases, failed property development projects incur losses not only for house buyers but also financial risks for banks that have put up the money. But the sales pattern is not a problem in itself. The aforementioned problems are merely associated with but not attributable to this business model. A blanket ban on the practice, as the central bank suggested, will actually create more problems than it solves. The central bank's advice is largely born of its concern for domestic banks' dangerous growing exposure to dodgy loans. The logic behind such a ban proceeds thus: If property developers cannot
raise enough funds from forward sales, they will have to slow their expansion
pace to a financially viable level, thus making loans much safer.
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