Zhu Yuan

The looming threat of high home prices

Updated: 2010-03-03 07:53

By Zhu Yuan (China Daily)

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Everybody is talking about housing prices, which have skyrocketed in recent years. In major cities such as Beijing and Shanghai, it is impossible for a white-collar worker to purchase a decent home even after saving all of his or her earnings over a lifetime.

Will the soaring of housing prices continue? Will measures by the central government, such as cracking down on the hoarding of land by real estate developers and raising the threshold for mortgage loans, stymie the price explosion and possibly lower rates? The biggest question, however, is whether the central government should take even more measures.

Amid all the opinions and suggestions about what to do about the real estate sector, the articles detailing Xia Bin's opinion are worth reading. They have been published in the book The Sober Head In the Crisis.

Xia insisted that the central government must stick to two principles in making policies to shift the real estate market: One is that there must be enough arable land for the food security of one-fourth of the world population; another is that basic living conditions must be guaranteed for the poorest in cities.

Despite the key role that real estate development plays in economic growth, China must keep no less than 120 million hectares of arable land to feed its population. The total arable land area was 125 million hectares by the end of 2008. As soaring housing prices stimulate both local governments and real estate developers to grab for profits, it will be very difficult to keep this bottom line from being broken.

It would be unforgivable for the government to simply look on while profit-seeking local governments defy land protection rules and provide more land than is mandated to real estate developers without any regard to the food security of this nation.

It would be more unforgivable to allow only a few to reap hefty profits from the market while the majority of residents are wondering how to afford a home. The greatest concern for the government is deciding how to provide affordable homes for low-income residents. It's a grave issue that is also a matter of political stability.

In answering the fears of a real estate bubble, it would be unimaginable for housing prices to continue to soar at this pace in the near future. Xia Bin states that bubbles must be gathering if the majority of trading is made in anticipation of huge returns from future price hikes.

It makes sense that a market supported solely by speculation can't be expected to stand up for long. Anyone who invests in houses for profits hopes that prices will soar. The investors then sell at the highest prices, and those who buy the houses after them expect a similar profit. No one wants to be the last unlucky investor who can't find a buyer. This is partly how the financial crisis came about on Wall Street.

According to Xia, a real estate market supported by speculation tends to fluctuate very often and in great degrees while a market sustained by consumption has the opposite effect. Xia states that this has been proven by what has happened in developed countries.

If speculators are the only ones who can afford prohibitively expensive homes, the gap between the haves and have-nots will greatly widen and the wealth will more quickly gather in the hands of a small group of people. This will amplify the uneven distribution of social wealth, which will result in growing grievances from the majority of residents. Soaring housing prices could thus contribute to political instability.

The central government has more than enough reason to intensify measures to control housing prices.

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