Mar 28, 2017 12:24 PM

Editorial: Are Purchase and Loan Restrictions Effective Way to Curb Property Bubble?

The Chinese government has hastily rolled out a series of measures to cool the country’s sizzling property market after prices surged in many cities in the past few months. Since the beginning of the year, over 20 cities have imposed more restrictions on homebuyers. Earlier this month, the city government in Beijing issued the harshest rules, raising the down-payment threshold for second-time homebuyers to over 60% from 50% and shortening the maximum repayment period to 25 years in a bid to put an end to the speculation-driven home-buying frenzy.

Policymakers signaled a move to tougher property market controls late last year when top officials at the Central Economic Work Conference, a key meeting to set the annual economic agenda, highlighted that “houses are for living in, not for speculating on.” In his recent speech to the National People’s Congress, China’s legislature, Premier Li Keqiang stressed the need to “prevent housing prices from rising too fast in major cities.” The central bank followed up, issuing directives to its local branches to rein in mortgage lending that had grown quickly in past years. Clearly, both central and local authorities are determined to prevent a housing bubble.

Despite differences in details, steps taken by all local authorities have one thing in common — trying to contain demand. But if you look at fluctuations in China’s housing market in the past two decades, it is clear that government intervention has always served as a temporary remedy to problems and has never offered any long-term solutions. Meanwhile, state meddling usually disturbs market order and distorts market expectations.

When looking at previous trends, it is obvious that China’s property market has fallen into a vicious circle, with government controls pushing up prices, prompting further tightening. But the main factor causing price surges is a lack of land supply. Local governments have long overlooked these supply-side factors, at times intentionally, and focused solely on purchase restrictions instead. But this year’s government work report proposed to “increase land supply for residential use in cities where housing prices have grown quickly.” This is the right approach, and local governments should quickly shift their focus accordingly.

For example, Beijing’s annual land supply for residential use has dropped from 978 hectares in 2013 to 103 hectares in 2016, despite the rising demand for new homes. This shrinking supply makes it almost impossible to prevent prices from rising sharply.

There are several social factors — such as the need to own property to improve one’s chances of finding a spouse — that add to the complexity of China’s housing market. So simple price-control measures aren’t enough to put the market back on track. A long-term solution requires changes to policies governing the land market, mortgage lending, education, and tax and household registration systems. Coordinated policies in all these areas are essential to prevent a property bubble.

If the latest control measures can temporarily stabilize housing prices, the next urgent step is to reform the urban land-supply system. For example, authorities must allow the construction of residential buildings in rural land designated for commercial development. Under China’s current property-rights system, urban dwellers and most rural households pay for the right to use property for a specific period (e.g., 40 to 70 years) and not for outright ownership. Authorities should offer the same land-use rights for rural land as those offered for urban land. And long-overdue legislation on land management should be fast-tracked. These will effectively expand the land and housing supply in top-tier cities.

The amount of land made available for development should be closely linked to local population projections. Land-supply quotas and construction plans should take into account migration patterns and should be made public to prevent speculation. Ultimately, local governments should reduce their overreliance on land auctions for revenue.

Next, the tax system needs to be reformed and a property tax introduced. Meanwhile, property transaction taxes, land value-added taxes and other fees should be reduced in order to reduce the tax burden on developers and the costs at the transaction stage, while raising levies on property ownership.

Thirdly, a multilayer housing market should be built to meet different types of demands. Taxes should be levied on home rental transactions, and authorities should tighten oversight on this growing market. Legislation and incentive policies should also be put in place to encourage local authorities to invest in affordable housing for low-income households.

Lastly, the education and social welfare systems and household registration rules have to be changed gradually to reduce distortions in the housing market. This, for example, could stamp out phenomena such as families spending tens of thousands of dollars on unlivable pigeon-coop-size houses near elite schools. Efforts to improve equal access to education, health care, welfare and other public services across the country will reduce overcrowding in big cities, and the urbanization process should pay more attention to people’s well-being. Reforms should also focus on driving state-owned enterprises — whose core business is not property development — out of the market to prevent players with deep pockets from pushing up land prices through speculative buying.

China’s housing market has become increasingly polarized over the past few years as the income gap between big and small cities widen, reflecting the imbalance in regional development. China has long channeled all its efforts to support the growth of a few big cities such as Beijing, Shanghai and Shenzhen, draining all kinds of resources from other regions. Such an unbalanced approach to development can no longer be sustained.

A healthy property market is vital for economic progress as it is related to a wide range of industries and services, including construction, building materials, furniture and home-appliance manufacturing. China’s economy is still facing mounting uncertainties, and adjusting the property market requires prudence and dexterity.

The latest round of controlling measures might successfully rein in prices to some extent, but long-term concerns will remain. Policymakers must avoid crafting property industry policies that are shortsighted. They must lay a solid foundation for the industry’s long-term development and focus on the effectiveness and long-term consequences when implementing property market control measures.

Hu Shuli is the chief editor of Caixin Media.

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