Housing still on unsustainable path

The deceleration in China's economy last year was mainly because of a slowdown in property construction that was triggered by a tightening of policy controls on the sector. Developers deferred new construction projects and slowed or stalled many that were already underway. China's property sector is big enough to have repercussions around the world as orders for iron ore, copper and construction equipment dried up. But it was China's economy that bore the brunt of the impact. Last year's GDP growth was the weakest in more than a decade, according to official figures, and roughly two-thirds of the slowdown from the year before was directly due to the weakness in property.

So has the time come for the government to start thinking of relaxing its property market controls? And if now is not the moment for them to be relaxed, how long should we expect the controls to remain in place?

Relaxation of the controls, the most important of which are limits on purchases and on lending to developers and homebuyers, would be widely welcomed. Developers would benefit most but, as they restart projects in anticipation of a pick-up in sales, the gains would spread, including to the rest of the world. China's local governments would also be big winners. For many of them, the sale of land for housing development is a key source of revenue.

The case that the controls have served their purpose is straightforward. Public discontent with the level of property prices has abated significantly since the first round of controls was introduced nearly three years ago. Prices might only have levelled off rather than fallen in most places but, with incomes still rising fast, that has been enough to make the average home much more affordable.

The demand for new property is set to soar. China's urban population is likely to increase by nearly 200 million this decade, according to the United Nations. There is also substantial unmet demand from earlier waves of migrants, many of them still sleeping in dormitories and cramped workplace accommodations. Then there are the ranks of aging residential buildings that will soon need to be replaced.

All told, China's towns and cities are likely to need around 10 million new residential properties each year over the coming decade to meet this structural increase in demand. That is the equivalent of building the entire housing stock of the United Kingdom, Germany and France combined, or two-thirds of the housing stock of the US in just 10 years.

Given this, the answer to the question above might seem straightforward: There is no time to waste, so relax the controls. But that would be wrong.