Op-Ed Contributors

Blame the property boom on capital

By Fulong Wu (China Daily)
Updated: 2010-03-30 07:51

Editor's note: The soaring housing prices stimulated by the overfull investment poses a financial risk to China's economy and measures are needed to release the pressure of capital blowing up the property bubble.

Land-use rights for three plots in Beijing were auctioned off for record prices within two days at the end of the National People's Congress (NPC) annual session, which ironically had decided to rein in the skyrocketing housing prices. The successful bidders, as in many cases, were State-owned enterprises (SOEs).

No doubt, China's property market is overheated. But is there a bubble in the real estate sector?

It is necessary to ask this question because we don't know what exactly is meant by a "housing bubble". Often, we tend to consider housing prices as high if they rise beyond the reach of "ordinary people". In this sense, there indeed is a big bubble in the housing market. But housing prices have risen - especially last year - despite low affordability.

Irrespective of whether housing prices were high or low, migrant workers or low-income urban families can rarely afford to buy a house in cities. Hence, when we complain about housing prices being very high, we almost exclusively do so in reference to the middle-class. If we are talking about a bubble in the conventional real estate market sense, the housing market has always had one, and it has continued to grow.

So, what is so special now? It is the financial risk it poses and the damage it could cause to the economy. It is clear that the pumping of a lot of money, or capital liquidity, has caused the housing prices to rise sharply recently. A large part of that money, incidentally, came from the investment to reduce, if not neutralize, the impact of the global recession on China's manufacturing industry.

Soaring housing prices have for long been a contentious political issue. But the record prices that pieces of land have fetched recently can be attributed to the unbridled investments of large SOEs in the property sector.

Such has been the role of the SOEs in raising property prices that on March 18 the State-owned Assets Supervision and Administration Commission (ASAC) had to order 78 of the central government-owned behemoths to retreat from the realty sector.

Nevertheless, since these SOEs have a relatively small market share, the ASAC's measure is more a gesture than a real move to cool down the market. But some recent tightening policies requiring property developers to pay 50 percent land premium within one month of the transfer of land-use rights indicate that more direct control measures are in the pipeline to freeze capital liquidity in the real estate market.

The selectively targeted measures can release the pressure of capital blowing up the property bubble. This would be better than an overall tightening of credit or sudden retreat from the economic stimulus package, which could jeopardize China's economic recovery. If not, the worsening of the investment environment for manufacturing industries may turn more enterprises into property speculators, as it did just before the global recession.

Retrospectively, we can see this most recent boom has been driven largely by capital investment.

In 2007, there was a boom, and the central government tightened real estate policies and squeezed the bubble. That winter was a hard time for most property developers. But the global financial crisis, which started suddenly in mid-2008, rescued them. The fiscal policy turned from being tight to positive. Although it was intended to save the export-oriented manufacturing industries that were hit hard by the global downturn, the shift threw a lifeline to property developers. That helped them regain their confidence.

Just like in the days after the Asian financial crisis, housing development was picked as a major driver in late 2008 to boost domestic demand. Fixed assets were flooded by investment with relaxed credit. And though the National Development and Reform Commission has vehemently denied doubts over capital inflow into the property market, the 4-trillion-yuan ($586 billion) stimulus package may have had direct or indirect implications on the real estate sector.

International "hot money" flowed into China's assets market in the hope that the yuan would be revaluated. Institutional investors always expect to gain from rising property prices and/or currency revaluation. The property boom and the panic over "impending" inflation made the property market an attractive investment for the middle class to preserve its assets.

But when the middle class starts buying into an overheated property market, it is time for institutional investors to recede. Perhaps now is that time - except for reckless SOEs.

Rental yield in China is low, and does not justify buying a house to rent it out. We do not see the spread of "buy-to-let" in China. In fact, property owners don't rent out their second and/or third homes resulting in a high vacancy rate. Investment in property is made mainly to make profit from an increase in value.

That's why any change in the realty market would require the cooperation of local governments that are dependent on land revenue. Under a devolved tax-sharing system, local governments are responsible for a wide range of local expenditure and rely on tax rebate from the central government. The gap between revenue and expenditure is filled by "entrepreneurial governance", including transfer of land-use rights. So if the property bubble bursts, it would certainly send the heavily-indebted local governments into a financial tizzy.

The challenge thus is to manage the financial risk that the property boom poses to the economy.

In the short term, one measure would be to ensure a sound housing finance system, with robust mortgage check and higher down payment. More stringent regulations would include reducing the liquidity of assets.

In the long term, a more socially oriented housing policy may calm people's panicked nerves over housing shortage and lower expectations for asset appreciation. Innovative approaches can be adopted to expand social and commercial rentals. For example, instead of demolishing urban villages to convert them into "commodity housing" estates, governments can take in situ redevelopment measures, because progressive housing renewal and spontaneous development can provide low-cost housing for migrant workers as well as low-income urban families.

After all, it is not housing demand that is driving up property prices, it is capital.

The author is professor and director of Urban China Research Center at Cardiff University, UK

(China Daily 03/30/2010 page9)