Zhang Monan

Govt is lagging on home prices

By Zhang Monan (China Daily)
Updated: 2010-03-12 07:52

Controlling investments, establishing public housing policies and creating affordable homes just a sampling of measures

China must rectify its wayward policy on the real estate market to temper the heavy momentum of exceedingly high home prices.

With public dissatisfaction rising in line with prices, the housing problem has indisputably topped the agendas of the ongoing two sessions in Beijing.

The housing market is one of the biggest issues plaguing the Chinese economy and nationwide attention has focused on whether or not the country can fundamentally change its strict mentality on the real estate market and bring home prices down to a reasonable level.

To be clear, the current real estate industry has played a very important role in the Chinese economy. Statistics indicate that the country's real estate investments have reached a fifth and even a quarter of its total fixed assets investments and the added value produced by the sector accounts for 6 percent of its gross domestic product (GDP). While accelerating the country's urbanization and industrialization and bolstering a high-pace economic growth, the property investment economy, however, has also given rise to a raft of economic and social problems, such as the country's excessive dependence on real estate development, people's inability to buy homes and the lack of a regulation system in the real estate market.

The country's current finances dependent on land revenues, its accelerated urbanization, imbalanced supply and demand, and an increasing fluidity have contributed a lot to the current home prices. But the government's policy on housing, the slow-advancing, government-funded housing guarantee system, and an uneven distribution of public resources have served as larger factors behind the housing prices.

The government's wayward policy on the real estate market has directly dimmed the boundary between individual home buying and investment and speculative purchases.

Homes bear a double nature of consumption and investment. In a consumption-dominated market, housing prices are largely decided by supply-demand relations. But home prices remain particularly sensitive to a country's currency, capital and land policies if they become an investment tool. In that case, the supply and demand laws would fail to work in deciding housing prices. At an investment-rife housing market, an excessive fund inflow and expectations for a considerable return would extremely incite investment demands and push prices up.

"In China, the real estate sector has been considered a component of the national economy but not as its social responsibility," stated an article in Singapore's Lianhe Zaobao newspaper. As a result, the sector's contribution to the country's GDP has long been overemphasized and its social responsibility excessively underestimated or ignored. The sector's status as a pillar industry of the country's economy has stimulated investment demands and thus led to a serious distortion in government policy over the industry.

The lack of effective public housing policies has also contributed much to rapid rise in housing prices. After three decades of development, China's housing system has successively experienced a welfare-based allotment as well as commercialization and marketization. However, the country's public housing policy has been in a passive position to deal with ascending prices and is failing to form a set of effective policies on the industry. Compared with the rapid real estate development and its important role in the national economy, the country has been slow in making its public housing policies.

At the same time, a set of explicit land and financial and tax policies as well as policies on government-funded housing that may help resolve housing problems have not been made. As an enormous industry, a scientific and reasonable policy framework is badly needed to stop any concentrated and abrupt creation of policies as stopgap measures.

The country's unitary market supply model and its imbalanced distribution of public resources have been another factor behind the distorted high home prices.

Given the existence of multilayer housing demands among consumers, such as luxury homes for high-income groups, improving housing for the middle class and basic accommodations for the poor, the country should set up a diversified and multilevel housing supply system.

As a special commodity, market transactions should not be taken as the only means to distribute houses. Government interventions are also needed in the process, which is very common in foreign countries.

China should push for some sweeping reforms to its current government-funded housing supply system and try to return those investments and luxury housing demands to the market. To coordinate this, a set of reasonable land and financial policy arrangements should be forged to meet the country's multilayer housing demands.

A government-subsidized, housing-guarantee system should be built for lower-income residents. A public housing supply system should also be adopted to help the middle class overburdened by the current high housing prices. Housing prices have not only resulted in serious distortions in the real estate market but have also loomed large as a major problem to hinder the country's sustainable development and economic security if not resolved.

The author is an economics researcher with the State Information Center.

(China Daily 03/12/2010 page9)