In recent weeks, as home prices have continued to surge in China’s major cities, the government has released a round of measures to tighten up the market. Following on earlier measures increasing the down payment ratio for buyers of second homes, the authorities announced that recently divorced people would no longer qualify for the first-house discount, unless the marriage had been over for at least a year. This was a response to a rash of “fake divorces,” where people would split up just to get around the property limits.
The new measures may be able to temporarily stabilize house prices, but few believe that they will work in the long run. As a matter of fact, in the past few years, each round of restrictions has been followed by a new round of price surges. For many real estate speculators, action by the government to cool down prices has become a signal that it’s time to buy, as higher prices will be on the way in a matter of months.
Rather than resort to measures such as upping down payments or excluding people from buying houses in particular locations, which have repeatedly failed to keep prices down over the last few years, the government needs to tackle the underlying problems in the real estate market.
Firstly, to address the overheated property market, the government needs to control the size of the money supply, or M2. Economists have long argued that a fundamental reason behind soaring property prices has been a loose monetary supply. The recent price surge in Beijing, for example, took place immediately after China announced that it would maintain growth of 12 percent of M2 in 2017, slightly above the 11.5 percent level of 2016. As property prices in some major cities, including Beijing, Tianjin and Shanghai increased by over 50 percent in 2016, there is no reason for people to believe that property prices can stabilize if the monetary supply stays the same. If the government is serious about tackling the issue, it should show strong commitment by lowering the flow of M2.
Secondly, the government should increase the supply of land to the property market to address the supply/demand ratio. Under China’s land policy, the government has a monopoly over urban land. As many local governments depend on the revenue from selling land to real estate developers, there is an incentive for local governments to maximize their revenues by controlling the supply of land.
Thirdly, the government needs to continue to improve the business environment. One reason that the real estate industry is so attractive compared to other industries is that there’s a dire lack of alternative investment channels in China. As the most lucrative industries are controlled by China’s powerful state-owned enterprises, the sectors open to private capital are universally less attractive than the real estate market.
The government must realize that soaring property prices and the lack of alternative investment channels have formed a vicious circle. As property prices continue to rise, it enforces the now prevalent idea that investing in the real estate sector yields far more profits than in other sectors.
The result is that capital and investment prefer the real estate industry far more than other sectors that are preferred by the government. That causes a lack of capital and financial support for the real economy in these sectors, to which the government then responds by further increasing monetary supply in the hope of injecting more capital into these sectors. This in turn has led to further investment in the real estate sector and higher property prices.
The government must show the political will to break the vicious circle, as it poses a great threat both to China’s political stability and its economic future.
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