Ren Xingzhou

Since 2008, an obvious change showing a downtrend has turned up in China's real estate market performance, bringing about a pronounced decline in volume of commercial housing trade and some drop of price rise. In particular, since the second half of the year, more people have taken a wait-and-see attitude toward the real estate market, leading to an enlarging shrinkage of the volume of trade and a continuous fall of the soaring price in 70 large and medium-sized cities. All these facts have suggested that China's real estate market has entered the period of temporary downturn. Market adjustment has inevitably produced an important impact on the current real estate investment, local land selling and relevant tax revenue, resulting in a prominent impact on the entire economic growth.

I. Principal Causes of the Temporary Downturn of the Current Real Estate Market

It is not fortuitous that the real estate market entered a period of temporary downturn in 2008. It is an inevitable outcome resulting from the comprehensive impact of various factors.

1. An outcome of the cyclical development of the industries

During the new round of fast economic growth between 2003～2007, China's GDP saw an average annual increase of 10.6%. In 2007, the GDP totaled nearly 25 trillion yuan, scaling a new height, with China's overall national strength being considerably enhanced. At the same time, the real estate industry, as a pillar industry of the national economy, grew rapidly, with the real estate investment increasing faster than fixed asset investment and GDP in the same period; the area of the sold commercial housing increased by 2.04 times over a span of five years; and the area of the sold commercial residences grew by 2.13 times. During this period, propelled by China's industrialization and urbanization and by the economic globalization, the development of the real estate market accelerated constantly, and the market mechanism had played a fundamental role in distributing the real estate resources. The real estate industry has played a major role in fuelling the growth of the national economy, bringing along the rapid growth of relevant industries.

Nevertheless, in the course of its continuous rapid growth, the real estate market has also accumulated many contradictions and problems, such as the excessively fast increase of the real estate investment, the constant rising of the housing prices, the conspicuous disequilibrium of the housing supply structure and the lack of guaranteed housing supplies. Those problems have seriously affected the continuous and sound development of the real estate market. Hence, in terms of its own operation, the real estate market, through rapid development for several consecutive years, will inevitably enter a period of temporary downturn to deal, through mandatory market adjustment, with the contradictions and problems accumulated for years and to reach a new equilibrium, so as to build up energy for the further development.

2. An objective demand of bringing the regulating role of the market mechanism into play to rule out the bubble economy and to bring the real estate industry back to its rational development

The bubbles are constantly aggregating when the real estate industry grows continually and rapidly. Over recent two years, in particular, housing prices have risen substantially, with the housing prices in some cities increased by over 50% and even higher within one year. The continually increasing housing prices have led to a great deal of speculations driving up housing prices as well as rising land prices, which have enabled developers to auction off land at high prices while gaining excess earnings. This in turn has given further impetus to a drastic rise of housing prices, forming a vicious circle of high housing prices, high land prices, higher housing prices, and higher land prices. In this case, more and more bubbles have been accumulated and the irrational practices pervading the markets have become more and more conspicuous. (Local governments have played a certain part in the course of land and housing price rises in waves. It is mainly because land prices are tied up with local finance, making additional revenue for local governments). In the development of the house structure, the building space of houses has become more and more spacious and high-grade apartments and villas have been a pursuit of the developers, whereas the number of the moderate- and low-priced medium- and small-sized homes needed by ordinary residents has reduced evidently, thus accumulating bubbles in terms of the house structure. Such a market situation has become hard to carry on in many places, calling for the overall adjustment of the industry to rule out the bubbles and to bring the industry back onto the right track for its rational development.

3. Lack of stimulus for the growth of the entire industry due to the overdrawing of the market purchasing power

In recent years, the excessively fast rise of housing prices has resulted in excessively high housing prices in many cities, deviating far from the affordable demand on the market, and with the overall house price being further pushed up by the ever-increasing house area, the purchasing power on the market has been seriously overdrawn, bringing about an evidently inadequate stimulus for the development of the industry and showing an obvious lack of stimulus for the continuous growth of the entire industry. When there is excess speculative demand on the market, the false prosperity will cover up the problem for the time being. Once the policy has checked the speculation and the trend-related changes have taken place on the market, the insufficiency of the market purchasing power will be immediately brought to light and the market demand will decrease evidently, thus forcing the market to adopt a downward trend.

4. Substantial influence exerted by the international financial crisis on China's domestic real estate industry

In 2008, the American financial crisis originated from its sub-prime mortgage broke out and affected the whole world in the latter half of the year, spreading rapidly to real economies. In the crisis, the real estate sectors of various countries were the first to be seriously affected, with the housing prices of many countries declining sharply and the number of market transactions seeing its utmost shrinkage. The financial crisis has inflicted heavy losses on the real estate markets of various countries in at least three aspects. Firstly, the crisis has resulted in a currency deflation and the financial institutions have become more cautious in granting loans, causing double impact on the real estate development and consumption sectors which are highly dependent on finance and credit. Secondly, the crisis has caused economic recession, more unemployment and less household income. It was firstly the handsome expenditures that had been cut down, thus inevitably bringing down drastically the purchasing power for high-valued consumer goods like homes. Thirdly, the crisis has had a direct influence on people's consumption confidence and expectancy, leaving more consumers to keep their purses tight and adopt a wait-and-see attitude. All these factors are also having impact on China's real estate market in varying degrees and, particularly, they have produced serious negative effects on people's consumption psychology and expectancy.

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