Caixin
Aug 14, 2018 12:34 PM
OPINION

Editorial: China Must Start Treating Root Causes of Property Woes

China is once more ratcheting up its property-market controls. On Aug. 7, China’s Ministry of Housing and Urban-Rural Development announced that it would clamp down on real estate speculation, take strong measures against property developers and agents acting illegally, and “firmly hold accountable local governments that did not put in their best effort, had large market fluctuations, or were unable to meet regulatory goals.” The ministry’s wording showed an unprecedented level of urgency and severity.

Since the start of 2018, many cities have sent strong signals regarding the property market. This is a plan that is both comprehensive and city-specific. The policies released by various cities differ in form but share the same essence. They aim to achieve results by exerting pressure on the demand side through methods like raising the threshold for home purchases, and increasing the difficulty of transferring ownership. These actions show the local governments’ subjective efforts to meet the people’s need for housing. In a time when economic growth is facing increased downward pressure, doubling down on property-market controls shows the government’s determination not to engage in massive, indiscriminate stimulus.

However, administrative measures alone are far from sufficient to ensure the healthy development of the property market. Administrative measures can indeed help to stabilize home prices, to a certain extent, for a short while. However, as years of experience have shown, the moment the measures are loosened, home prices bounce back with a vengeance. This has become an established rule of the property market. Not only does this mean that controls on the industry fail to give the public sufficient confidence, they also cause anxiety and make developers and homebuyers more likely to expect disorder and feel hopeless. It is more important to understand that high home prices are caused by a whole host of factors, including unequal development between regions, migration, land supply and financial credit, as well as the strong link between local government finances and land sales. Measures that place too much emphasis on the supply side will be unable to untangle this knot. Administrative measures could even encourage some government departments to increase their own powers while fostering and consolidating territorial interests, which is something China should work to prevent without delay.

Take the latest high-profile crackdown as an example. Because local governments are to a large extent financially dependent on land revenue, the security of local bonds is also tied up with the prices of land and housing. It is difficult for local governments not to feel conflicted over property-market controls. While it makes sense to hold the relevant officials accountable in order to allow the unimpeded implementation of policy, there should be a clear definition and legitimate basis for accountability. The government should determine, for example, how to set regulatory objectives, and what degree of price fluctuation in the housing market can be attributed to market changes rather than inadequate regulation.

China is a vast country, and the economic-development levels and housing supply and demand of its many regions varies dramatically and never ceases changing. It is relatively difficult to determine which price levels are reasonable, and to use this as a basis to determine between normal and abnormal fluctuations. If the central government interprets housing-market controls to mean not allowing home prices to fall or rise, then local governments will be placed in a tough situation. In the past few years, some local governments claimed they wanted to hold accountable officials who did not put enough work into using up housing stock, or who did not produce clear results. But these efforts were ultimately fruitless, and should serve as a lesson for future decisions. It is easy to pick out a few local governments or officials as examples, but it is more difficult to be fair and reasonable, and win the hearts and minds of the parties involved. Enforcing real estate regulation may require displays of power, but its long-term success depends more on scientific decision-making and strict implementation.

Relying on short-term administrative measures to keep home prices from rising may help in extremely urgent situations, but cannot be a long-term solution. As President Xi Jinping said in his report at the 19th Party Congress, China should “move faster to put in place a housing system that ensures supply through multiple sources, provides housing support through multiple channels, and encourages both housing purchase and renting.” The Politburo meeting of July 31, when Chinese leaders met to discuss economic policy for the second half of the year, also called for the “resolute containment of rising home prices,” and the accelerated construction of a stable and healthy development mechanism that will advance the housing market in the long term. However, China still needs to find a clear path and a detailed plan for constructing such a system.

Building a system that will be effective in the long term is a complicated and difficult task, which will require the Chinese government to tackle the key points of the problems it faces. Land supply is a key factor. To a large extent, housing prices are essentially land prices. Since the introduction of land auctions in 2004, local governments have learned how to use their monopoly over land supply to their advantage, and it has become the norm for governments to push land prices up by withholding supply. If land prices remain high, they will aggravate the widespread practice of speculation in the housing market. Therefore, it is absolutely necessary to implement land reform measures, strengthen the supply of land, and increase the number of channels and means for land supply. At the moment, with local government debt risk increasing, reducing local governments’ reliance on land sales should no longer depend on their willingness, but should be treated as an inescapable choice.

Homes should be for living in, not speculating on. The key is to allow homes to be used for their intended purpose of housing the public. The rise of speculation on types of housing like “school zone homes” is primarily due to the fact that too many public services are tied to housing. During the school admission process, many schools give priority to applicants who own homes in particular neighborhoods. In recent years, even though some local governments have tried to give renters and homeowners equal rights when it comes to school admission, in reality they are still far from equal. At the same time, home residence is inextricably linked with household registration and other policies. It can be said that the problems of the housing market are the result of incomplete reforms in other areas. China will pay a high social cost if the major cities currently facing a large influx of migrants cannot solve the related problems of housing, access to schooling, and social security.

The commodification of homes should follow market principles. At a time when market controls are being strengthened, China must be especially vigilant against the return of anti-market behaviors. Recently, some cities encouraged state-owned enterprises to use the land they held to build housing, which was interpreted by many to mean the return of the welfare housing allocation system of the pre-reform era. Promoting housing construction by state-owned enterprises is a misunderstanding or misrepresentation of the idea of multiple land supply sources. It not only seriously goes against the rules of the market, it also goes against all the property market reforms that have been implemented since 1998. A few people will use this to seek personal gain, while seriously harming social equality. If we want to talk about accountability, this kind of brazenly regressive behavior should be subjected to the greatest scrutiny.

Property taxes have often been considered the key component of a successful long-term system. However, as international experience shoes, property tax alone cannot solve the fundamental problem of rising home prices. In China, taxation cannot thoroughly solve core problems like land supply, and land-related finances. China cannot expect to achieve results from using taxation to control property prices, if it has not yet clarified and dealt with issues of land transfer fees, and taxes and fees for existing property.

The facts have repeatedly shown that stringent administrative controls cannot solve the fundamental contradiction between supply and demand in the property market. Instead, administrative controls endlessly consume government resources without satisfying the needs of the people. In order to ensure the healthy development of the property market, and truly fulfill the people’s housing needs, China must persevere in housing reforms based on the deepening of market reforms while coordinating between reforms in related fields. China has been treating the symptoms of its housing problems for many years, but it should have begun treating the cause long ago.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)

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