Price control no cure for property bubble
(China Daily)
Updated: 2005-04-29 09:32

The new measures the State Council proposed on Wednesday to enhance control over China's fast-expanding real estate sector represents a much-needed comprehensive approach to tackling this multi-faceted problem.

Rather than focusing on house price levels, these new measures urge local governments to carry out their duty to provide low-priced housing for low-income groups and warn domestic banks against extending real estate-related loans.

Ever tougher action taken by the the central government recently to cool the red-hot domestic real estate sector shows there is a growing sense of urgency over sky-rocketing house prices in major Chinese cities, particularly in Shanghai.

Though competing and conflicting indexes of house prices make it very difficult to judge the actual price trend, some domestic media reports say that Shanghai's average house price last week dropped, unbelievably, by about 18 per cent over the previous week.

The great potential of Shanghai, a rapidly booming international city, has sent housing prices through the roof in comparison with local residents' income levels in the past few years. Performance of the local property market has thus become a barometer of the sizzling real estate sector nationwide.

Set against the quarterly statistics that show the average house price in China's 35 major cities rose by 9.8 per cent in the first quarter over the same period last year, the price drop last week in Shanghai appears more like a temporary dip in sales.

However, if house prices continue to fall as dramatically, a price collapse may be right around the corner now.

Given the vital importance of the real estate sector to the national economy which accounted for roughly one-fifth of Shanghai's gross domestic product growth in 2004 such a scenario would be disastrous.

But this terrible possibility does not mean that the Chinese authorities should remain unmoved in face of overheating investment in the property market.

Instead, it indicates that it is not just price that has to be taken into consideration if the government wants to pull the domestic real estate sector back on a healthy track.

Causes behind the price hikes are many, including residents' expanding need for bigger and more comfortable living space, real estate developers' ability to profit from a fast-growing market, domestic banks' inclination to grant mortgage loans, and many local governments' unspoken desire to use this opportunity to boost local economic growth.

Of course, speculative house-buyers at home and abroad are to blame for much of the excessive price hikes in some major cities like Shanghai.

To turn the real estate sector into a sustainable growth engine will be crucial to the country's long-term economic development.

It is as important to forestall property bubbles so as to prevent a sudden fall of house prices.

To this end, policy-makers need to make sure they know about each cause of the price hikes.

The new measures the State Council came up with have hit many, if not all, of the underlying causes behind runaway house prices in some Chinese cities.

It is hoped that the earnest implementation of these new measures can help bring about more rational expectations from all participants in a market too hot for simple calm thinking.

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