ince the government launched measures to reduce the unsold inventory in the real estate market this year, housing prices have surged yet again in many cities, drawing in individual homeowners and investors alike. In some cities, the return of the property boom has caused something close to public panic, as many couples resorted to “divorcing” – on paper – in order to circumvent their cities’ restrictions on how many properties each family can own.
House prices have been rising steeply for over a decade, and the property bubble has become a major threat to China’s economic development. Not only does it pump up the costs of operating a business and increase the financial burden on companies, it also distorts the distribution of wealth and perverts both social values and corporate culture. It makes the traditional values of industry and commitment to work a joke, as the profits to be gained from having a foot in the housing market are infinitely greater than anything people can get from their own work. At the corporate level, it’s a severe obstacle to the government’s push to upgrade Chinese manufacturing.
During the housing market frenzy, the profit to be made from flipping a home in a major city after holding onto it for just a few month has often dwarfed the amount that a mid-sized manufacturing company can make in a year. As a result, legions of Chinese companies, from home appliance manufacturers to food and drink firms, have pushed their resources into property into order to chase a quick profit. This poses a serious threat to the sustainability of the real economy in the long run.
One of the biggest problems with the property boom is that people now believe that the government either can’t get it under control, or won’t. In past decades, each round of soaring prices triggered a round of regulation in response, but the regulations never last as long, or have as much effect, as the booms. Just as the regulations started to work, the government would loosen them, leading to a fresh set of explosions in an already inflated property market.
For example, after several years of runaway property prices by the mid-2000s, the government reined them in with strengthened regulations. But when the global financial crisis hit later in 2008, China resorted to a 4 trillion yuan (US$593.6 billion) stimulus package, causing prices to rocket once again.
The fresh spurt of the housing market in this year has followed the same pattern. The market had lost steam by late 2014 after several years of new regulations. However, as the decline began to cause stagnation, the government, worried about China’s economic slowdown, retracted the policies once again. Instead of allowing the market to cool off, the authorities made “reducing inventory” a major policy priority in 2015, giving many cities the signal to loosen controls once again.
As prices spiral upward, the authorities have again tightened controls, with over two dozen cities announcing measures to curb the market. While these measures appear to have brought prices under control, public faith in the government over the issue has been eroded. To bring development of the real estate industry back on the right track, the government has to stop flip-flopping between restrictions and laxity, and move away from short-term goals. Instead, it needs to adopt a long-term perspective on the property market’s overall role in the country’s economic and political landscape. A failure to do so will not only cause economic crisis, but have political consequences, as people’s faith in the government is shattered alongside their dreams of owning a home.