By Xia Bin, Research Institute of Finance, the DRC

Research Report No 017, 2010

Today there are divergent views on China's real estate market. Macroeconomic decision-makers, regional governments, developers, industry authorities, investors, speculators, low-income people and various media all have their own views on house prices and the policies on house prices both in the past and at present. And their views are as divergent as ever. While some people brag about "rigid demand", low-income people are bitter about exorbitant house prices, saying the purchase of a house would cost a middle-class family's lifetime consumption. And while the government is making surveys on land hoarding and increasing land supply, new "land kings" (land sold at record high prices) appear one after another. Why are views so divergent and arguments so hectic that real estate market regulation has become the hottest of all hot macroeconomic topics?

It is precisely because views are so divergent and because the real estate market directly concerns current economic recovery and social stability that a serious reflection on China's experience regarding real estate market development over the past decade or so is all the more timely. Apparently, a piecemeal approach cannot fundamentally solve the problem. In this article, I would like to concentrate my views on the following policy options.

1. The direction of the reform is correct

The reform to introduce land-use right auction and housing monetization respectively in 1987 and 1988 was indisputably correct. The reform was indispensable for establishing China's market systems. The prices of land and houses, which are two economic factors, must be determined by the market. It is a direction that should be upheld in the future. However, this does not mean in any way that house prices can hike to levels where low-income people are unable to materialize their basic housing demand through monetization. It is not the original goal of the reform.

2. The bottom line of farmland should never be changed

With scarce land and 1.3 billion people, China must be self-sufficient in food supply. This is a cardinal strategy for China to compete with major powers. For this reason, a minimum amount of farmland should become the absolute bottom line for land planning and house construction. Of course, this bottom line may vary in the long run and in different historical periods, due to changes to world political and economic orders or due to drastic increase in agricultural productivity. But this bottom line is extremely important and must be upheld in the foreseeable future.

3. Allowing low-income people to have houses is also a bottom line

It is both the goal of the reform to switch from welfare housing to monetized housing and also the foundation for the country's social and political stability. This is also a bottom line that can never be changed. In this reform, policies and tactics are required to guarantee this bottom line when high-grade houses have appeared. When ordinary people find it difficult to use their disposable incomes to purchase houses in a real estate market determined by diverse international and domestic factors, the government must do all it can to first ensure most of these people, a factor affecting political stability, to have houses to live, no matter how the real estate market is regulated. The government can accomplish this task through land supply, city planning, fiscal arrangement, public transportation network and preferential subsidies. It can do so even through subsidized house renting. In this respect, even the countries and regions with sound market systems, such as the Nordic countries, the United States, Germany, Singapore and China's Hong Kong, all have this bottom line without exception. If China fails to guarantee this bottom line now, its guidelines for real estate market regulation should be reconsidered.

4. The specious rigid demand

China, noted for huge population and scarce land, is experiencing a process of economic boom. Accordingly, the income of its people has also constantly risen and their housing demand has also become stronger. In this sense, this is a rigid demand for land and for quality housing. But in a different historical period, this "rigid demand" can become a relative and "flexible" one if the bottom line for most people to have houses is upheld. It is because the "rigid demand" can be entirely limited to the demand for quality houses if further policy adjustments are made. In other words, taxation can convert the income from house price hiking into a subsidy for houses rented or affordable houses purchased by low-income people. Then, house price hiking will have no relationship at all with the house-purchasing demand of low-income groups. As house price rises, subsidy rises, too, and more low-rent and affordable houses can be built. The "rigid" housing-purchasing demand will become a "flexible" one. In fact, if its policies can distinguish the demand for basic consumption-oriented housing from the demand for quality housing, the government naturally will face smaller pressure for a vigorous real estate market regulation, when the "rigid demand" drives up house prices. And the government will not have to ponder over how intensive its regulation should be, and the "rigid" demand will become a "flexible" one.

5. Pillar industries must also be subject to scale control

With a continuous rise in personal disposable income and a growing demand for housing improvement, the real estate market undoubtedly will make greater contributions to a country's GDP growth and will become a pillar industry carrying a growingly weight in the economy. In reality, the real estate market has played indelible roles in China's economic recovery both after the Asian financial crisis and after the U.S. financial crisis. But we must see that in the first place, the speed of real estate development, like other pillar industries, must be kept within limits. It does not mean the larger the better. Otherwise, Japan and the United States would have encountered no crisis. Secondly, the excess push by the real estate market as a pillar industry can bring growth to a country's economy. But this does not mean the country's economy has no serious structural problems and can realize sustainable growth. In this respect, we should learn from other countries. In China, as the personal consumption rate has continued to fall in the past decade or so and as the export decreased and growth slowed down in the wake of U.S. financial crisis, the government had no alternative but to maintain economic growth and employment through investment and especially excess real estate investment. It did so both after the Asian financial crisis and after the U.S. financial crisis. But this is not a long-term solution.

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