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Beware housing bubble

(China Daily)
Updated: 2009-07-21 07:55

The banking regulator's firm requirement of mortgage for buying a second home is a clear sign that Chinese policymakers are serious about the possible risk of a housing bubble.

However, this is not enough to deter the return of a housing bubble in the absence of a significant change of the current loose monetary policy.

There are increasing indications that, while the Chinese economy is taking the lead in recovering from the economic slump, the domestic property market has surged ahead of most other sectors.

Nationwide property sales in June rose 32 percent by floor space and 53 percent by value from a year earlier. And, new home prices in 36 medium and large Chinese cities rose 6.3 percent in June from a year earlier.

Such a housing boom looked unimaginable a couple of months ago. Falling housing prices and sales had then not only forced many real estate developers into a corner but also made it extremely difficult for local governments to raise funds from selling land lots. Worse, as a key source of investment growth, a sluggish property market had become a drag on the recovery of the Chinese economy.

Nonetheless, on the back of unprecedented credit support, a new and bigger property bubble has emerged now just as the country gets on the recovery track.

It seems obvious that rapid expansion of bank lending, which tripled year-on-year to hit a record 7.37 trillion yuan ($1.1 trillion) in the first half year, has been the most important driving force behind the surge in housing prices and sales to their peak levels of 2007.

Special Coverage: Housing in China Related readings:  Beijing's commercial property woes  Rich buy more space to live in  Is China's real estate recovery real?  Realty sector needs reality check

To consolidate the economic rebound, the Chinese government found it necessary to steadfastly adhere to the pro-active fiscal policy and relatively easy monetary policy.

As a result, accelerated real estate development - as a response to soaring housing prices - was expected to follow. The banking regulator is aware of the mounting risks of the current boom fueled by rapid loan growth.

The China Banking Regulatory Commission ordered domestic banks to charge higher interest on mortgages for second home buyers whose down payments should be not less than 40 percent of the price.

Such a move, in theory, should help reduce speculative purchases and stabilize housing prices. But given the flood of liquidity, it is hard to believe that the surge in housing prices will be reined in any time soon.

Policymakers should take more concrete measures to reassure the public that they will not allow housing prices to go through the roof.