Recent rise in house prices due to misinterpretation of policies to stabilize growth and renewed speculation

The rising house prices in some cities in recent months have caused concerns that the real estate regulations launched by the government over the past two years have failed to cool the market.

There are also concerns that speculators have returned to the market as the housing supply seems to be failing to meet demand.

However, looking at China's housing market over the past decade it is clear that the fundamental reason underlying the rapid rise of house prices was the preferential housing credit and taxation policies. Undoubtedly, the country's easing monetary conditions have fuelled a further rise in house prices.

In the context of an excessive credit expansion, domestic property prices have kept rising on the whole over the past decade. Statistics show that China's newly increased bank credit volume from 1998 to 2002 was 6.7 trillion yuan ($1.05 trillion), but it increased to 14.7 trillion yuan from 2003 to 2007. It even rocketed to 28.8 trillion yuan during the four years from 2008 to 2011, with the per capita growth rate several times that of previous years.

The majority of these bank loans flowed into the real estate market in the form of residents' borrowing. Statistics show that residents received bank loans of 600 billion yuan in 2008, but the amount increased to 2.46 trillion yuan in 2009, 2.9 trillion yuan in 2010 and 2.5 trillion yuan in 2011. With the increase in the volume of private loans, the rise in house prices was inevitable. Without such a high financial leverage ratio and a correspondingly loose monetary atmosphere, property prices would not have risen to the same extent.

Although the government's ongoing economic stimulus policies and measures aimed at maintaining economic growth have to some extent fueled the rise in house prices in recent months, the upward momentum is by no means the result of the country's loose credit and monetary policies as some have claimed.

The country's monetary policy and financial market conditions today are not the same as they were in 2009. The government has maintained its tightened credit and monetary policies aimed at curbing real estate speculation. But despite the government's increased efforts to maintain economic growth, the country's monetary market has not changed.

From September 2008 to the end of 2009, for example, China's central bank lowered commercial banks' reserve ratio by a total of 400 basis points, from 17.5 percent to 13.5 percent. However, only two similar cuts have so far been made this year. With a 100-basis-point cut, the reserve ratio for domestic large-sized financial institutions now still stands at 20 percent. In comparison, in 2008 the one-year benchmark interest rate for lending was lowered to 5.4 percent after a cut of 216 basis points in the context of a moderately loose monetary policy.

Compared with an unprecedented preferential interest rate policy for house purchases in the latter half of 2008, in which residents could enjoy 30 percent off the benchmark lending rates, this year's preferential interest rate for homebuyers is at a much lower level.

Despite a central bank regulation that commercial banks can restore the maximum preferential interest rates for first-time homebuyers to 70 percent, it is impossible for residents to gain such a big interest rate discount under the current monetary policy.

Also, compared with the 20 percent deposit homebuyers needed in the latter half of 2008, people now need a down payment of more than 60 percent of a property's value if they apply for a mortgage. Without some fundamental changes to the current tightened housing credit and differentiated interest rate policy, domestic property prices are unlikely to return to the fast-track rises seen in the latter half of 2008 and 2009.

As the exchange rate of the yuan is stabilizing, the growth of China's funds outstanding for foreign exchange has also decelerated, resulting in the dynamic contraction of the country's base money. In this context, the credit growth in recent months has not only been much slower than in 2009, but also far lower than expected. All these indicate that banks have already changed their focus from credit expansion to risk awareness, which will undercut the possibility of a continuous rise in property prices.

The current rise in house prices has to a large extent been a result of misinterpretation of the government's policies to stimulate the economy, an increase in real estate speculation and excessive concerns among ordinary homebuyers that prices will continue to rise.

To reverse the rising trend in house prices, the central government should make further efforts to convince people that they can expect prices to fall and pay close attention to the risk of real estate bubbles.

The author is a researcher with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.