More than a dozen of China’s largest cities — including Beijing, Tianjin, Chengdu and Shenzhen — have introduced new restrictions, from raising down payments and mortgage thresholds, to imposing quotas on how many homes individuals can buy. But such measures have produced limited results in the past.
Correcting such a vast market isn’t easy and will require strong resolve if there is to be real reform. Key elements to putting China’s housing market on a healthy track include curbing local governments’ reliance on land sales for revenue and improving Beijing’s ability to control the economy at a macro level. Simple price controls that have been a government staple are usually ineffective, so policy makers need to look for other means to address the problem.
The dangers of overly inflated housing prices are huge. Indicators such as the ratio of mortgage payments to a buyer’s income indicate that on a relative basis, China’s current housing prices are now more expensive than those during Japan’s property bubble, and are close to US prices just before the global financial crisis exploded.
Skyrocketing housing prices have raised business and living costs in urban areas while widening the gap between homeowners and renters. The flood of investment into the property market also threatens the national economy, since the burst of a real estate bubble would pose huge risks at a time when the real economy remains sluggish.
Somewhat ironically, banks currently see mortgages as safer bets than loans for manufacturing and other industrial sectors. Banks especially prefer mortgages in major cities, where housing prices have been especially high. Without a unified financial regulatory system, supervision that might encourage more prudent lending at the national level has been hard to implement.
The unrelenting rise in home prices has diverged sharply from China’s recent demographic changes and economic fundamentals. The price surge is also jeopardising Beijing’s efforts to close the nation’s wealth gap by spending heavily to improve the social security network to assist lower income earners.
High home prices are making the rich wealthier, while doing little or nothing to help the poor. Surging prices have also eroded the wealth of middle class people who don’t own homes and made life more difficult for young people and new arrivals to big cities. The housing market has become a magnet for speculative investors motivated by fear and insecurity about the future.
The main driving force behind China’s rising home prices is reliance on land sales to fill local government coffers. About half of the money generated from land sales now goes to local governments, which currently account for over half of their fiscal revenues. This has posed a dilemma for many local governments, who now have an incentive to keep property prices artificially high.
China’s land finance model has its roots in the planned economy era, with ownership by the state in urban areas and collective ownership of rural land. That model has led to inefficient use of land in the current era and has also created room for corruption and social conflict.
Land sales may have provided a quick fix to boost local government revenues and economic development, but this is unsustainable. Reality calls for a careful transition that will allow local governments to switch from reliance on land sales for their revenues to greater dependence on tax collection. Action should be taken now.
The transition will create risks, but those can be controlled through prudent policy. Delay of such a transition and tolerance of soaring housing prices will only lead to bigger risks, and price controls and other measures that focus only on market supply will be minimally effective without fundamental change.
China’s property explosion began in the 1990s with reforms to home purchase and ownership policies, and has been fuelled since then by the country’s rapid urbanisation and easing monetary policies. Now, the market is in urgent need of reform, similar to other parts of China’s economy. To achieve a more sustainable and healthier development, the government needs to quickly enact prudent policy supervision and cut local government reliance on land sales for revenue.
Hu Shuli is Chief Editor of Caixin Media in Beijing.