Real estate a real problem

China’s real estate sector is now moving like a runaway train — and it will be equally dangerous to either stop it or let it go unchecked.

Data for November from both the official statistics bureau and private institutions have pointed to relentless price rises, a largely uninterrupted trend that has continued for about a decade. While it is behind China’s glamorous GDP growth, it has also become a nightmare for hesitant home-buyers.

Home prices in China have climbed to a level that many analysts say are about to trigger a financial crisis — in first-tier cities such as Beijing and Shanghai, prices in some locations have soared tenfold in the past decade. Facing growing public complaints, policymakers have repeatedly vowed to tame prices and make them affordable.

Interestingly, policymakers have been playing a game of “creating a stone that they cannot lift”.

They have been leaving the taps of liquidity running for years, which, on a macroeconomic level, is the real cause of continually rising home prices. In the wake of the 2008 global financial crisis, in particular, policymakers abruptly launched the 4-trillion-yuan stimulus program, leading to a new round of home price gains.

Policymakers’ vows to keep home prices under control pale against the backdrop of the liquidity creation programs. It will be a big surprise if they can make it.

Unless the macroeconomic fundamentals are changed and liquidity is controlled, home prices will continue to hover at high levels until the bubble bursts.

Weaning liquidity addiction will be a hard nut to crack. Widespread market panic caused by temporary liquidity contraction in June is a case in point.

Moreover, any big price correction in the real estate market will prove disastrous for the banking system and the economy as a whole.

And as people’s hopes to buy an affordable home are dampened by rising prices, they may become less confident in policymakers, which, in the longer term, will prove a problem even bigger than real estate price corrections.