Putting house prices in order

Local govts' attempts to prevent housing prices from falling will not succeed as market undergoes necessary adjustment

Housing authorities of Nanning, capital of the Guangxi Zhuang autonomous region, issued a document in late April that said residents with a hukou (household registration) in any of its five neighboring cities, such as Beihai, Qinzhou and Yulin, could buy homes in Nanning.

According to media reports, this is the first shot formally fired by a local government to rescue the housing market. To prevent speculation in the housing market and keep property prices in check, authorities in major cities have for years banned non-local residents from buying houses within their jurisdictions. Some earlier media reports had said that cities like Changsha, Hangzhou, Zhengzhou and Wenzhou were likely to relax rules for buying houses but relevant authorities denied them.

Some local governments, like the one in Nanning, however, have joined the race to relax rules for purchasing houses because they want to prevent housing prices from dropping steeply, for they fear that that will not only cause a drop in the local GDP, but also increase their fiscal risks manyfold.

Over the past few years, land sales or bank loans against land mortgages have been behind the excessive credit expansion of many local governments. These local governments now fear that a drop in housing prices will dampen demand and thus reduce their fiscal revenues. They believe that only a rising - or at least a stable - housing market can cover their swollen fiscal and debt risks.

Given these conditions, can measures such as easing the requirements for purchasing houses in some cities guarantee the housing market's health? We can be pretty sure that housing prices in China have entered a "period of adjustment" after rising to dangerously high levels. In fact, we can expect a different type of price adjustment because housing prices are not likely to rise any further after going through the roof in the past decade.

Since price increase has greatly influenced homebuyers' expectations over the years, it is difficult to stop speculators from entering the housing market by just passing some administrative measures. For example, when the Beijing local government imposed a conditional ban on certain groups of people from buying houses in the city in 2011, an underground ring sprang up immediately to help unqualified homebuyers bypass the ban if they paid a "fee". Similarly, at a time when most potential homebuyers expect housing prices to fall, how can local authorities entice them into buying houses at current prices?

More importantly, the ongoing changes in the housing market are not the short-term results of the macro-regulations the country adopted a few years ago. They are more like cyclical adjustments - a result of the changing financial conditions in China and abroad - which will be difficult to reverse irrespective of the "bailout" policies adopted by local governments.

The housing market's prosperity, to a large extent, depends on a country's financial condition and housing-related taxes. A low mortgage rate, a high leverage ratio and easy access to bank loans will create a prosperous housing sector - as is the case in China. But if such policies are reversed, they will bring about some mandatory changes, no matter whether bailout measures are adopted or not.

Moreover, the explosive growth of Internet finance since 2003 and "shadow banking" have to some extent changed the direction of the flow of funds in the domestic financial market. The outflow of a large amount of deposits from China's normal financial system has not only reduced available funds that banks use for lending, but also has pushed up lending prices. That domestic banks are charging higher interest rates while the scale of lending is decreasing is a contradiction of sorts, and it will affect housing credit demands.

The depreciation of the yuan against the US dollar over the past few months, too, has dampened the prospects of yuan-denominated assets such as real estate, and deterred investors and speculators from buying new property or prompted them to sell property they had bought earlier.

It is likely that the fear of a collapse in the supply of their funds will force some developers to lower housing prices in order to get faster returns on their investment, which will play an important role in influencing housing prices.

After a decade of rising prices, China's housing market is bound to lose its upward momentum. Bailout policies by local governments to prevent housing prices from falling, therefore, are unlikely to yield expected results. Instead, they could aggravate investors' concerns over risks and thus accelerate their flight from the housing market.

The author is a researcher at the Institute of Finance and Banking, affiliated to the Chinese Academy of Social Sciences.