ccording to a report released by the China Real Estate Association, China’s real estate market saw another round of price hike in the first half of 2020 despite the economic impact of the coronavirus pandemic. While the median growth rate of 2.2 percent among pre-owned properties appears to be a mild figure, some major cities witnessed a double-digit jump in house prices. Shenzhen, China’s tech center north of Hong Kong, for example, reported 15 percent growth in pre-owned property prices. Even some third-tier cities, such as Lianyungang in Jiangsu Province and Dongguan in Guangdong Province reported double-digit growth rates.
The boom seems counterintuitive considering the overall condition of China’s economy. Though China has managed to control the coronavirus outbreaks, the economy has not returned to its pre-Covid-19 numbers, with a projected growth rate far lower than in past years.
Several factors are behind the resurgence in house prices. While the government has injected liquidity into the economy to mitigate the pandemic’s impact, domestic and international uncertainties have led some enterprises to seek a safe haven in the real estate market.
Also, because government revenue fell during the pandemic, local governments have an interest in boosting their real estate markets. Land lease fees have long been a major source of revenue at the local level, often accounting for half of their total revenue. According to official data, government revenue dropped 14.5 percent in the first four months of 2020.
Some local governments have been hit particularly hard, and as local governments’ financial sources deteriorate, boosting the real estate sector is a direct and effective way to address these woes.
To deal with the risk posed by the coronavirus crisis to China’s economic health, the government launched a “new infrastructure” initiative involving 3.5 trillion yuan (US$500b) in investment over the next five years. Unlike conventional infrastructure building, the initiative focuses on the high-tech sector such as 5G, big data and artificial intelligence. But some analysts are concerned that investment may spill over to the real estate market. In 2008, China launched a 4 trillion yuan (US$573b) package to deal with the 2008 global financial crisis. Focused on building highways, railways and airports, the initiative was a major driving force behind China’s runaway house prices over the past decade.
There has long been consensus on the negative impact of the soaring property prices on China’s economy among experts and officials. They not only increase income disparity, undermine political stability and pose serious risks to China’s financial system, but also put pressure on China’s manufacturing sector by driving up the costs of land, labor and living.
In the past couple of years, China has taken serious measures to stabilize the real estate market. In the pandemic-rearranged economy, China’s policymakers are now facing some new, complicated challenges.
To bring house prices under control, China should monitor the use and investment of funds under the new infrastructure initiative. In the meantime, China should continue to reduce the dependence of local governments on the real estate market for revenue through financial reforms.
As China faces both the coronavirus crisis and rising tensions with the US, a second wave of runaway house prices is the last thing the country needs.