Housing regulations necessary for stable economic growth, people’s well-being

By Sheng Songcheng Source:Global Times Published: 2019/5/8 20:43:40


Illustration: Luo Xuan/GT



China's latest real estate policy will help move the sector in the right direction. Aimed at regulating housing prices, the country will advance the real economy and increase household income. 

Household income is expected to outrun the uptick in home prices. Reducing the price ratio to income will deflate the real estate bubble and restore housing prices. 

It was reported the housing market has experienced a comeback following the Chinese New Year. The National Bureau of Statistics (NBS) released a report that found new and second-hand homes in 70 major Chinese cities, especially in third- and fourth-tier cities, experienced increases in March. 

To develop a healthy and sustainable real estate market, China needs to stick to regulating the sector. 

The policy addresses multiple concerns. First, it considers both the supply and demand side. Second, it safeguards against a large influx of money pouring into the real estate industry. Third, expectations that housing prices will never go down should be changed. And lastly, housing prices will remain stable so household incomes can catch up. China's macroeconomic condition will also benefit from stable housing prices. 

Several factors contribute to the recent pick-up in the real estate market. One of them is the economy. Today, the economy has stabilized with businesses showing greater confidence. 

According to the NBS, the Purchasing Manager Index bounced back to 50.5 percent in March from the previous 49.2 percent, marking the highest number in five months, an indication the overall economy has improved. The latest figure shows that PMI is still in the boom zone, recording 50.1 in April 2019. 

Infrastructure investment has driven healthy growth in investment while manufacturing sectors have experienced upgrades. Private companies also have greater policy support, and external pressure has also temporarily eased. 

Moreover, both monetary and fiscal policies have coordinated with one another, maintaining sufficient liquidity. The People's Bank of China released data that revealed an 8.6 percent M2 growth in March, 0.6 percentage points higher than the previous period. 

Another factor is that more people are moving to cities as hukou registration thresholds have been relaxed. 

The policy has shown signs of loosening up with cities reducing mortgage rates for first-time buyers. Though not on a large scale, this trend should be heeded. 

Overall, the domestic real estate sector will continue to fend off potential price surges.

For the past decade, real estate policies have oscillated between loosening up during economic downturns, and tightening when housing prices have soared. This latest control policy stemmed from 2015, when housing prices surged. 

Real estate market adjustments will lead to reduction of local governments' revenues generated by land sales, but price stability will always be prioritized.  

Since real estate regulation is directly connected to economic development and well-being, government regulations are necessary along with market-orientated resource allocation. 

First, regulation should consider both the supply side and demand side. Over the years, China's real estate regulations have focused more on restraining demand. However, this is an expedient measure and not a solution for supply and demand imbalances. Without solving the problem, whenever the housing purchase policy is relaxed, demand for real estate that accumulated over the years will typically shock the market. 

Second, as a capital-based industry, the real estate sector is highly related with the financial sector. It also has a higher gross profit rate than manufacturing industries, which attracts more capital into the real estate sector. 

Utilizing regulations can help reduce the profitability of the real estate sector to the average level among industries, and achieve optimal resource allocation with the real estate industry and real economy. 

Third, expectations affect market behavior, but they are not always rational. Often, they are self-actualized and only reinforce themselves. 

If there is too much control on the demand side, it will not change existing expectations but only reinforce them. More regulation on the supply side should be adopted. The latest round of real estate regulation has turned around the expectation to some extent. And we should not stop there.

To sum up, China will have to maintain housing prices at a stable level so that household income can catch up. The US and Japan paid a great price by addressing their respective real estate bubbles and high housing prices, which should be avoided as much as possible. 

Housing prices in Japan bottomed out in 1991. Real estate market risk spilled over to the financial market and real economy, putting an end to Japan's golden age of high growth and pushing it into a 20-year low-growth period. 

Unlike the US and Japan, in China, urban land is owned by the state and rural land is normally under collective ownership, which allows it to gain better control of land supply. 

Real estate regulations rely on government determination. Matching demand with supply will stabilize the market and make sure regulations are successfully implemented.

The author is a senior adviser to the People's Bank of China and adjunct professor of economics and finance at China Europe International Business School. bizopinion@globaltimes.com.cn

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