Where is the property market headed after one year of cooling and the ensuing six months of policy loosening? Will the market recover as expected?
The adjustments in the property market have just started, and we (at the Chinese Academy of Governance) estimate the process to last five to six years. After developing at a fast pace for 15 years, it is normal for a property market to see a low run for five to six years, and no policies can change this trend.
The regional discrepancy in China's property market is clear: the eastern region witnessed a rebound while the central and western regions slowed down further. Housing investment jumped 11.4 percent year-on-year in the coastal region, or 1 percentage point higher than in 2014, but only 6.7 percent in the central and 11.1 percent in the western regions — a drop of 1.8 and 1.7 percentage points from the average rate of 2014.
Investment growth, especially in the coastal region, seems to signal that the housing market is on way to stabilizing. But the view will be different when we see it from the data of housing sales — by floor area and by volume. Data on the growth in supply and demand show an asymmetric feature in property adjustments: The drop in investment growth slowed whereas the slump in sales accelerated. What does this mean for the housing market?
Behind this asymmetry hides a huge risk. Real estate demand continues to fall, but developers refuse to act correspondingly. That is against market rules. But why do they keep supplying amid such weak demand? That's a question we need to ponder.
There are two reasons for that. First, real estate developers have got the strong support of local governments. Since the end of last year the central bank has been easing the monetary policy by lowering the reserve requirement ratio and interest rate. On March 30, it also cut the minimum down payment for the purchase of a second house from 60 percent to 40 percent. For developers, this is a strong bailout signal by the central government, so they are confident enough to increase their investment that's against market forces.
Second, developers have long been spoiled by a surging housing market. They believe, no matter how wrong it is, that housing prices will keep rising and this momentum will never end, because the country's urbanization is far from over. As such, they think the property market will maintain its bull run amid the accelerating urbanization drive.
The asymmetric adjustment between demand and supply means more houses will be built but fewer can be sold. That will lead to increasingly higher stocks than the market can handle. The longer such a situation persists, the greater will be the risks to the real estate and financing markets.
Therefore, local governments have to pull the brakes on the "bailout" policy by encouraging developers to reduce housing prices in order to boost demand, while curbing investment as a synchronized adjustment to cut supply. This will speed up the process for the market to clear the stocks.
While trying to salvage the housing market, we cannot rely on an anti-market force to buck the trend. When demand weakens amid adjustments, we have to act on price and supply. Once housing prices drop, demand will rise. Stabilizing the price and investment will only lead to an increasingly shrinking demand, hindering the economic cycle and stagnating the real estate market amid the lack of capital liquidity.
There's nothing to fear when housing prices and investment drop because of adjustments. It is just a process to squeeze out bubbles and prevent financial risks. And the long-term existence of real estate bubbles can block industrial upgrading, expand the income gap and impede urbanization. Good news will come along with such adjustments. For instance, it will help boost the urbanization drive, narrow people's income gap and propel the development of the real economy. In particular, it will help more funds and resources to flow into industrial upgrading and for innovations.
The author Wang Xiaoguang is a researcher at and vice-director of the Department of Policymaking Consultation of the Chinese Academy of Governance.
