Wednesday, Mar 29, 2017, 7:07 PM CST – China

Commentary

China needs to broaden its scope to stabilize the real estate industry

Recent efforts to shrink inventories of unsold real estate can only work in the short term

The real estate industry was one of the most prosperous sectors during China’s recent period of rapid economic growth. But with the country currently mired in an economic slowdown, the prospect of a collapse of the real estate market has become a major concern for decision makers, as such an event would trigger a dangerous chain reaction. In the past month, reducing unsold inventory has become a top priority for both the central government and its local counterparts.

In February, China’s central bank lowered the down payment requirement rate for home loans. On February 17 and 19, the central bank, the Ministry of Finance and the Ministry of Housing and Urban-Rural Development co-launched several policies favorable to home buyers, including increasing the interest earned by public housing funds, which help low- and middle-income home buyers purchase homes, and lowering various tax rates on real estate transactions.

In the meantime, local governments in many provinces, including Gansu, Jiangxi, Shanxi, Shandong and Anhui, have followed this up by launching similar stimulus packages to boost the real estate market. In Jiangxi, reducing real estate inventory has become a political task, as the provincial government has decided to hold officials accountable for failing to achieve designated goals.

To a certain extent, similar policies appear to have worked in the past. Following various policies initiated in 2015 to bolster the housing industry, the annual sales of commercial and residential housing increased by 14.4 percent and 16.6 percent, respectively.

However, the increase in housing sales contrasts sharply with the declining confidence of land developers in the market. In 2015, the total area of new land development and the area of new residential construction was 1.54 billion and 1.07 billion square meters, respectively, marking a 14 percent and 14.6 percent decline from the previous year. At the same time, land developers only purchased 228 million square meters in 2015, a 31.7 percent drop from 2014. All in all, total investment attracted by the housing industry amounted to 9.6 trillion yuan (US$1.5tn) in 2015, barely above the 2014 figure (9.5 trillion yuan).

If the trend continues, the real estate industry may fall into a recession in 2016, which would have a significant impact on the government’s efforts to maintain a healthy growth rate, in turn further dampening investor confidence. The government’s efforts to slash inventory may boost housing sales in the short term, but as economic uncertainty looms, it may prove ineffective at solving the real estate market’s long-term problems.

 To solve those issues, the government should not focus solely on encouraging the sale of new homes. Since new home sales are more profitable for both the government (in terms of taxes) and land developers, the entire real estate industry has been primarily focused on selling homes in past years, which has led to various problems, such as poor construction and relatively low safety and energy-efficiency standards.

In stabilizing the real estate industry, the government should take a more holistic approach to better the business environment. It should improve the comprehensive development of the industry and encourage new areas of growth, such as the renovation of existing homes, construction of public retirement homes and real estate management, all of which have been largely neglected.

Moreover, the government needs to tackle some institutional problems deep-seated within China’s urbanization process. For example, when migrant workers relocate to a new city, they lack access to adequate public services, affecting both their ability and willingness to purchase a home in their new city of residence.

Only by resolving these issues can China’s real estate industry achieve stable and sustainable development, key to the wellbeing of China’s overall economy. 

In Jiangxi, reducing real estate inventory has become a political task, as the provincial government has decided to hold officials accountable for failing to achieve designated goals.

The author is a columnist with China Newsweek, NewsChina’s sister publication.

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