Local developers and government measures should enable affordable housing instead of re-inflating the bubble

Beijing, Shanghai and other big cities have witnessed robust rebounds in house sales despite Premier Wen Jiabao's harsher-than-ever remarks that China's house prices are still far from a reasonable level.

In the first 10 days of March, the sales area of newly built commercial houses in Shanghai reached 417,000 square meters, an increase of 165.6 percent on the same period in February. There was also an increase in the sales of secondhand homes. The increased house sales have reminded many of the "little spring" that the country's housing market experienced in March 2009, which kicked off a two-year-long rise in house prices against the backdrop of the global economic slowdown.

Admittedly, this year's real estate policies are much different from those in 2009. China's frenzied rise in house prices, which started two years ago, was largely driven by the series of unprecedented stimulus packages launched in 2009 aimed at curbing the national economic slowdown. At the time, the country chose to lower stamp and business taxes as the main way to spur housing consumption and boost the sluggish market.

However, the top authorities have repeatedly reiterated tightened real estate regulatory policies this year to check speculation and return house prices to a reasonable level. Statistics from the National Bureau of Statistics show that house prices in the country's 70 large and medium-sized cities are on a declining trajectory, but so far the decline has not been as low as expected.

What then are the reasons for homebuyers' rushing back into the housing market despite the fact that house prices have not declined to a reasonable level?

Developers have made efforts to boost sales, by reducing or even waiving down-payments and offering big discounts, and people are worried that the current tightened real estate regulations will not last amid the national economic deceleration.

From the end of the year till now, the authorities have stressed many times their determination to unwaveringly adopt tightened regulatory policies, but some minor adjustments have concurrently been made to housing regulations. For example, the authorities have stressed that the country will increase the supply of common commercial houses and Liu Shiyu, deputy chief of China's central bank, recently said that commercial banks should guarantee lending to first-time home buyers and ensure they enjoy a differentiated preferential interest rate. With such encouragement from the country's monetary authorities, a preferential interest rate for first-home buyers has been widely adopted across the country.

In fact, some banks in Beijing already offered the benchmark interest rate to homebuyers instead of the higher rates adopted from the start of this year. Although these favorable policies are said to target low-income homebuyers only, past practices indicate that frequent violations will be committed with the assistance of real estate intermediaries, developers or players with related interests in the housing market, with the result that the help intended for low-income buyers will again turn out to apply to all and be used to boost the whole housing market.

A typical case is that the policies adopted in October 2008 aimed at promoting housing consumption among first-time homebuyers finally evolved into unprecedented nationwide speculation. At a time when the country's monitoring regime over housing transactions remains incomplete and a unified information-sharing network is yet to be established, the latest targeted preferential policy is likely to also become speculator-favorable. The possibility of this has increased at a time when the country remains in a difficult macroeconomic situation and local governments suffer fiscal insufficiencies, as indicated by failed attempts by some local governments to suspend a years-long targeted ban on house purchases.

Such unconcealed efforts to abandon the central government's restrictions also transmit a signal to potential homebuyers that a rebound in the faltering housing market is on the way. Any of the country's preferential policies aimed at low-income homebuyers will likely offer local governments plagued by fiscal shortages a rare chance to fully relax the regulations.

The country should remain steadfast and not relax the restrictions on real estate investment and speculation while meting out preferential policies to targeted homebuyers. It should also remain vigilant against any possibility that the policies aimed at these buyers will not be interpreted as steps toward suspending real estate regulations at a time when domestic houses prices are still stubbornly high and regulations remain at a critical juncture.

The central government should put an immediate end to any local measures in contravention of its tightened regulatory policies and hold the violators accountable. The absence of such an unequivocal stance will be misunderstood by local governments and encourage them to circumvent the tightening measures, which will once again put house prices onto a rising trajectory.

The author is a Beijing-based economics commentator.

(China Daily 03/31/2012 page5)