Economy should grow beyond real estate sector

The fall of housing prices in China has given rise to a belief that the withering of the real estate industry will force the Chinese economy into a more difficult situation. In response, some people are calling for the government to take action to prevent housing prices from plummeting.

Despite the correlation between housing prices and macroeconomic performance, such appeals cannot hold, says an article in 21st Century Business Herald. Excerpts:

The continuous soaring of housing prices did lead a kind of economic growth model. However, the flaws of the model are apparent.

Exorbitant housing prices raise unrealistic expectations for future growth among many people, especially real estate developers and local governments. As a result, almost all cities carry out large-scale land development and infrastructure construction projects, to meet “the strong demands” of new citizens, as they claim in their ambitious city planning schedules.

This robust growth of the real estate industry has promoted the development of the financial and construction industries in the past decade, which grew 2.5-fold and 2.4-fold, in comparable terms, while China’s gross domestic product only increased 1.7 times. One in five migrant workers in China, during the same time period, earned their living in the construction industry.

But no country can secure sustainable growth simply by building houses for its citizens. The overreliance on housing and land markets makes the industry and governments vulnerable to considerable financial and inflationary risks. The high returns from the real estate industry absorb too much money from the real economy, especially in the less-developed central and west China regions.

The fall in housing prices in China is a reminder of the flaws of a growth model that depends on building houses. China’s huge population, vast territory and stable political situation provide the nation with great potential to transform its growth model from being investment-driven to becoming innovation-boosted.