The reality of realty sector

Updated: 2012-07-25 13:40

(China Daily)

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The recent upturn in the real estate market has complicated policymaking.

Housing prices and transactions have picked up gradually after several months of stagnation. An official survey across 70 Chinese cities shows housing prices in 25 cities rose month-on-month in June. That contrasts with the situation in May when only six cities saw month-on-month increase and is a reversal of falling prices since October.

Apart from market demand fueled by monetary policy easing in recent months, local governments' de facto loosening of regulatory rules is responsible for the rise in transactions. In fact, a number of local governments have announced policies to facilitate house buying in recent months.

That local governments have tried to boost home sales is understandable because, together with related incomes, they account for a large part of local revenues. After all, in the first half of this year, income from transfer of land use rights across China fell by 27.5 percent year-on-year, according to the Ministry of Finance.

In some regions such as Beijing, and Guangdong, Henan and Zhejiang provinces, fiscal revenue growth slowed down significantly in the first half. China's economic slowdown has led to fiscal difficulties in these regions. HSBC's flash manufacturing purchasing managers index for China remains below 50 - the watershed of economic activity - in July, although it rose to 49.5 from 48.2 in June. The index has been below 50 for nine consecutive months, indicating protracted economic difficulties.

Despite the general expectations of an economic recovery in the second half, local governments' fiscal conditions will not improve instantly, and they will remain motivated to facilitate home sales, which will put the central government to severe test.

The Chinese Academy of Social Sciences warned in a report on Monday that housing prices could rebound sharply in the second half of the year. If that happens, it will be against the spirit of the central government's regulation policies.

The central government cannot afford to see that happen and the current purchase restraining policy will continue. Also, it will not be surprising to see new policies being devised to prevent housing prices from shooting up.