The poor performance of the housing market indicates the looming crisis behind local governments’ over-reliance on selling land for revenue. The governments should awaken to the fact that land is no longer a reliable asset for governments to raise funds and promote economic growth on paper, says an article in 21st Century Business Herald. Excerpts:

A listed real estate enterprise’s notice said it would not lose money if the housing price of its projects did not fall more than 23.22 percent. The report sends a signal that the profit ratio of this real estate enterprise, if not representative of the property industry as a whole, is very high. Under this circumstance, some local governments’ stimulus policies to prevent the decline of housing prices seem ridiculous.

The housing market is cooling quickly in China. But most property enterprises hold a wait-and-see attitude and do not want to lower housing prices. Obviously, they are waiting for the government’s bailout policies, which appeared after the global financial crisis of 2008.

In fact, there is a strong demand for houses in China today but exorbitant high prices keep potential homebuyers out of the market. The prices become so high in some cities that even the banks dare not lend money to buyers as generously as before.

Real estate enterprises have the space to lower their prices. It is some local governments’ stimulus policies that maintain the enterprises’ illusion that the central government will eventually help the real estate market, as it did before.

What the local governments worry about is their own balance sheets, because many of them rely on land transfers to generate revenue and pay their debts.

The land market has been hot for the past two years, during which housing prices also rebounded fast from a low point in late 2010. It is predictable that the house supply will rise this year. If the government further stimulates the market, both prices and the trade in the housing market will grow fast. The bubble will burst soon, if this happens.

The governments need to send a clear message to property enterprises that they will not “save” them. Property firms should take various promotional means to divest themselves of their stock and ease their temporary financial pressure.

In this context, the governments should see more than only their own interests, which go against market discipline and create bigger risks for the future.

The local governments should become more tolerant of the pains of transformation of both the growth model and government roles.