Op-Ed Contributors

Tethering the housing bubble

By Zuo Xiaolei (China Daily)
Updated: 2010-04-27 07:59

A rise in the supply of currency, the changing roles of homes as investment tools and misguided policies have created unbridled housing prices

The economy may have gotten off to a great start in the first quarter and inflation may have been tempered, but let's not forget that China is still facing a huge challenge: Slowing down soaring real estate prices and making sure the housing bubble lands softly.

Make no mistake about it, the housing bubble is real, contrary to what many critics have said recently. So if the economy is to develop effectively and distinctly from its old growth model, housing market problems must be rectified.

One angle to tackle first is the abnormal increase in the supply of money. This is exactly what the central authorities have been working intensively on in recent weeks after making the distinction between speculative investments in properties and payments for the purpose of living in a home.

Last year's currency supply propelled the hikes in housing prices. It should be noted that local governments are still impulsively investing to boost their local economies. To do so, they need a greater supply of currency. But this in turn fuels price hikes and builds up pressure on inflation. A greater currency supply will make it difficult to manage inflation.

The State Council, China's Cabinet, recently has been calling for greater management on liquidity. Quantity management tools, deposit reserve ratio and open market operations (including 3-year central bank bills) would be used interchangeably to control liquidity. For any overheated investment sector, an adjustment in credit line might be a necessary regulation measure.

Recently, the government introduced new regulation policies. Fortunately, they are all well-targeted, especially through its aim of expanding the construction of affordable homes and giving incentives for homeowners to actually live in their homes instead of using them as investment tools. It still remains to be seen if the policies are effectively implemented but if they are, the real estate bubble will diminish in size and land safely.

The real estate market is obviously a key factor to stable economic growth this year. Last year, households used 80 percent of their incomes to pay down their average monthly mortgage. This is 60 percent higher than the domestic security line, the most glaring proof that a bubble exists.

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