Overheating housing market shows no signs of cooling

• Source: Global Times
• [08:39 January 04 2010]
• Comments

 Editor’s Note:

For many Chinese, housing and healthcare are the two most critical issues in their lives at the moment. Both underwent remarkable changes in 2009, and generated strong public opinion in response. Global Times (GT) reporter Wu Meng interviewed He Maochun (He), senior researcher at the National Center for Policy Research, Tsinghua University, and Zhang Xiaojing (Zhang), macroeconomic researcher at the Institute of Economics, Chinese Academy of Social Sciences, on living conditions in China in 2009 and the prospects for 2010.

GT: What was the most important event connected to housing in 2009?

He: Rising housing prices were certainly ordinary people’s biggest concern. Housing prices not only soared in cosmopolitan cities like Beijing and Shanghai, but gained unexpected momentum in second-tier cities like Hangzhou, Wuhan and Changsha. I have held a wait-and-see attitude to real estate prices throughout the year, but the growth rate still surprised me.

GT: Many people are frustrated at high housing prices. Why haven’t the prices dropped in response to the economic crisis?

He: The main reason, as far as I can see, is China’s strong need to stimulate economic development. Current conditions are not so promising for traditional money-making industries like manufacturing due to weak exports and unfavorable channels. Expansion of domestic demand thus depends primarily on government-led investment.

Apart from the portion devoted to public facilities, the majority of the remaining money is distributed to State-owned enterprises. Most of these enterprises tried to profit by buying land to build property, which added heat to the already sizzling real estate market and hoisted housing prices to record highs.

Even ordinary people collectively possess over 22 trillion yuan ($3.2 trillion) of deposits. Due to the economic downturn, they regard property as the soundest investment. Generally speaking, this purchasing fever, coupled with a lack of other investment channels, has resulted in the embarrassing reality of a price spike.

Zhang: The reasons can be roughly summed up as follows.

The first cause for soaring housing prices is the government’s rescue package, including giving strong support to boosting real estate. Its real estate credit policies and tax preferential policies play an especially effective role in driving up prices.

An over-generous monetary policy comes next. The nearly 10 trillion yuan ($1.5 trillion) in loans provided in 2009 enabled a large amount of capital to flood into the asset market, which led to asset price inflation and naturally contributed to rising real estate prices.

Local governments have also played a significant part, particularly through land sales on which they make a commission.

GT: Should we build more government-subsidized housing?

He: Such housing cannot meet public needs, especially people’s desire to have a home. Consequently, the actual results of construction of government-subsidized housing may depart considerably from its desired effect. The fundamental solution to people’s housing problems is to give policy support for ordinary people to be able to rent and purchase homes.

I think the biggest problem lies in inadequate support for renters. Take the present low-income housing and affordable housing as examples. Both the initiatory policies and their subsequent implementation differed remarkably from the original vision. Some local governments have taken advantage of the loopholes in the policy to make a profit for themselves.

Zhang: It is absolutely unquestionable that the government needs to bear the responsibility of providing housing. The problem lies in what corresponding policies and mechanisms should be established. Currently, the government has not yet provided adequate housing due to local governments’ lack of motivation.

Therefore, fiscal restructuring and significant changes to the performance evaluation system for local governments are necessary to help local governments meet the standard. Certainly, the government also needs to give serious and substantial consideration to how much housing it should provide, and how to develop a just, fair and open supply mechanism to give the housing to those who genuinely need it.

GT: When it comes to housing in 2010, what new policies will there be, and what effects will they have?

He: I am not sure what new policies the government will introduce in 2010, but I am not very optimistic about their effects. I believe the government’s lead is very important; nevertheless, adjustment of a single policy may backfire to further heat the already boiling real estate.

Zhang: We need to supply cheap housing first, then land, and we should get rid of the incentives for local governments to earn land-transfer fees. These are priority issues.

GT: Medical reforms that had been planned for many years were finally launched over the first half of 2009. What effects have they had?

He: An important prerequisite for medical reform is policy transparency. That is to say, people’s representatives need to make their voices heard in the legislative process in order to benefit people’s health insurance. Without a guarantee of the right to speak, medical reform will just be empty talk. And legislative bodies also need to listen more frequently to the people.

Different interest groups with diverse needs for health insurance have already formed in Chinese society, which requires the government to take care of the interests of the overwhelming majority and to develop policies according to their wishes. Medical reform in China concerns a huge amount of people, and will take a long time.