Leaders must root out speculation from realty sector and apply sweeping reforms to ensure its healthy development

The developments in China's real estate sector over the past decade indicate that it has been largely swayed by government policies. So to get an idea how the real estate market will perform and whether housing prices will rise or fall in 2013, we should understand the government's housing regulations and the extent to which it will tolerate price rise, instead of only analyzing supply-demand relations.

A look at the current housing market will help us find clues to arrive at a judgment about the possible real estate policies the government will adopt this year. Data from the National Bureau of Statistics indicate that housing prices in 53 of China's 70 large and medium-sized cities increased month-on-month in November, compared with 35 in October.

A recent survey by China's central bank shows that 29 percent respondents believe housing prices will continue to rise in the next quarter - the figure is 10 percentage points higher than a year ago. In fact, rising housing prices have triggered panic-buying in some first-tier cities and attracted some non-real estate enterprises to the housing sector in the hope of making bigger profits.

The re-emerging frenzy in the housing market indicates the housing regulations, which have been in place for years, have failed to achieve the expected results. It also shows there has been no fundamental change in the housing market's speculative nature.

In a housing market rife with speculation, prices are usually decided by market expectations that expand the price bubble. But the expanding housing bubble and continuous price rise will touch the bottom line of the housing regulations and hamper the efforts of China's new leadership to promote its healthy development. Further increase in housing prices will be against the new leadership's economic strategy, which focuses more on quality development, and undercut its efforts to improve people's livelihood.

Recent reports of the monetary authorities and the Chinese Academy of Social Sciences both say high housing prices have already seriously affected ordinary people's livelihood and undermined their capability to buy a house. The excessively high proportion of income that ordinary people have to set aside to buy a house forces them to drastically cut their consumption in other fields, which is not good for the overall economy.

Skyrocketing housing prices have yielded considerable profits to developers, speculators and local governments that depend on transfer of land-use rights for a high percentage of their revenues. No wonder, some people's wealth has increased at an astonishing pace within a few years.

But in a zero-sum housing market, the drastic rise in some people's wealth and local governments' fiscal revenues that a booming housing market has caused mean others, especially lower-income homebuyers, have to dig deeper into their pockets.

The pursuit of higher profits has prompted some people to channel various kinds of social resources into the housing market over the past decade, which is tantamount to hijacking the national economy to benefit the housing sector. The realty-dependent economic model has seriously hampered China's efforts to change its industrial structure and transform its economic development strategy. It has also resulted in a series of social issues, ranging from serious uneven income distribution to corruption and hatred for the rich.

If the housing bubble continues to expand with the same momentum it has done in the past decade, the consequences will be devastating when it bursts. It would cause banking and financial crises - even economic and social crises cannot be ruled out. And if such a thing happens, it will push China into a decades-long economic recession, akin to what happened to Japan after its housing bubble burst in the 1980s.

Housing prices in China increased further in recent months largely because the market believed the country's new leadership would not take measures to change the existing housing policies after assuming office in March. There is speculation that even the current housing regulations could be loosened or lifted.

Despite its unwavering determination to maintain strict housing regulations, as indicated by the tone of the Central Economic Work Conference, the government has so far failed to take forcible measures to change the housing market's speculative nature. On the contrary, the recent emphasis on urbanization and accelerated efforts to provide more housing units is likely to fuel fresh speculation in the real estate sector if preventive measures are not taken soon.

The trend of the housing market this year will be decided by how far the government will tolerate further increase in housing prices and whether it takes necessary measures to turn the real estate sector into one led by self-accommodating demand. That, however, will depend on the new leadership's determination to press ahead with stricter housing regulations. If speculation in the market persists and necessary measures are not taken to change the housing sector's trend, housing prices will continue to rise and inflate the price bubble further, which will push China toward the old economic growth model.

But if the new leadership shows zero tolerance toward speculation and expedites efforts to implement sweeping reforms in the housing market, such as adopting harsher credit and taxation policies, to deflate the price bubble, then the market will jump back on the track of reasonable and healthy development.

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

(China Daily 01/12/2013 page5)