To Rescue or Not to Rescue: Economists Debate Slumping House Market
6 September 2008
It seems that bad things come in threes. China’s A-share market has dropped to well less than 2500 points from a high of 6100 points less than a year ago. Its manufacturers for export are facing troubled times, with higher material and labour costs and depressed overseas markets. And now, China’s real estate industry is also heading for a deep adjustment. How to eliminate the bubbles and avoid serious side effects to the economy at the same time has China’s decision makers and economists going around and around.
Morgan Stanley chief economist for Greater China Wang Qing said in his latest research report that with the country’s export growth slowing down, maintaining continuous growth of the real estate industry has become that much more import. If the real estate industry were to lose its status as a growth engine, any optimism about the economy would be hard to sustain in the next year or two.
Wang Qing thinks a declining real estate industry would force the government to loosen control policies to keep it from pushing up unemployment, a problem that could have serious consequences for the society as a whole.
But Zhong Wei, director of the Economic Research Center at Beijing Normal University, believes loosening credit makes no sense. “Loosening credit can only increase the housing vacancy rate,” said Zhong Wei. He says many people think the problem with the real estate market is a shortage of funds, but that is missing the point. “If no one buys houses, developers with more money will build more houses and only make matters worse.”
Disputes on Loosening Policy
Zhong Wei said in a research report that within this year the real estate industry’s fund shortage would reach over 67 billion yuan, and in the coming year it could grow to about 1 trillion yuan. “So this round of real estate market adjustment will last much longer than expected.”
Under these circumstances, many economists, including Gong Fangxiong and Wang Qing, are expecting the government to loosen monetary policy. Wang Qing thinks the government may loosen requirements for loans and reduce interest rates to help to improve housing purchasing power, and stimulate the market.
However, Zhong Wei believes the current housing credit policy is “already very loose”. According to him, since the central bank launched the “second apartment” policy at the end of last year, the rejection ratio for house mortgage loans of commercial banks has remained level. “But what if nobody applies for one?” asked Zhong Wei. The fact is, mortgage loan application rates have fallen at most banks.
Zhong Wei believes the industry is not so much short of money as of demand, and the government lacks effective measures to restore house buyers’ confidence.
As for the suggestions that the government should “save” the market, Ba Shusong, vice director of the Financial Research Institute of the Development Research Center for the State Council, thinks the government should encourage demand by reducing taxes and charges. “During an economic downturn, almost all industries expect the government to loosen credit. But tight macroeconomic policy is a key tone.
Mr. Ba thinks real estate developers must take responsibility for the recovery of their industry. Without house price/ income ratio adjustments, sales will not see a significant rebound, and the market will stagnate.
In fact, all these economists believe that, under current circumstances, cutting housing prices has become the most important measure for the market to save itself. Zhong Wei says the changing consumption demand is closely related to the dramatic price increases in 2006 and, especially, 2007. Developers gained huge profits from the crazy prices. “Now they’ll have to pay back several times more money to survive the market downturn.”
Local Governments Seek to Save the Market
Due to their huge stakes in real estate, some local governments have initiated measures to “save” the market.
In northeast China’s Dalian, the government is planning to adopt a series of policies to “maintain rapid and sound market development.” It is reported that these policies include expanding channels for loans from a housing fund, loosening loans for housing purchases in other cities, and encouraging personal commercial loans. The government is also planning to relieve real estate companies’ fund shortage by introducing new capital into the market and promoting cooperation between banks and real estate developers.
The Fuzhou government is focusing on the land transfer fee. The city’s land management department even suggests that developers should have the right to bargain over the price of lands originally belonging to the government. The government also plans to extend the time limit for the payment of the land transfer fee, exempt value-added tax on common residential homes, and set up a cooperation mechanism between banks and developers to support rational credit demands of qualified real estate companies.
Ba Shusong believes the Chinese economy, which has overly depended on exports with low value-added, is now transforming into a economy whose growth mainly depends on the expansion of domestic demand. Without a strong real estate market, the expansion of internal demand lacks support. Meanwhile, because of their “land finance”-based urbanization, local governments will try everything possible to promote the health of the real estate market.
But Zhong Wei thinks not even god can save the current real estate downturn. Besides the over-construction in recent years, led by ever-rising prices, there has been an erosion of buyers’ wealth. “Many think the stock and real estate markets’ slumps lead only to the shrinking of investors’ book value, but in fact this is not only book value!”
According to Zhong Wei’s estimation, the present stock market slump has cut about 2.3 trillion yuan off stock investors’ wealth, and 1 trillion yuan off fund investors’. “On this basis, the average loss for each stock account is around 20,000 yuan, and that for each fund account about 10,000 yuan. This is money people could have spent on education, medical treatment, or other consumption.”
Zhong Wei says this is only the first year of China’s economic downturn, and the next year will be worse. “The market will only enter a real downturn when land and housing prices are reduced publicly, instead of on the sly. Now is only the beginning.” He also warned developers who are still optimistic about the market and refuse to reduce prices that they “will be further punished by the market.”
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To Rescue or Not to Rescue: Economists Debate Slumping House Market
6 September 2008
It seems that bad things come in threes. China’s A-share market has dropped to well less than 2500 points from a high of 6100 points less than a year ago. Its manufacturers for export are facing troubled times, with higher material and labour costs and depressed overseas markets. And now, China’s real estate industry is also heading for a deep adjustment. How to eliminate the bubbles and avoid serious side effects to the economy at the same time has China’s decision makers and economists going around and around.
Morgan Stanley chief economist for Greater China Wang Qing said in his latest research report that with the country’s export growth slowing down, maintaining continuous growth of the real estate industry has become that much more import. If the real estate industry were to lose its status as a growth engine, any optimism about the economy would be hard to sustain in the next year or two.
Wang Qing thinks a declining real estate industry would force the government to loosen control policies to keep it from pushing up unemployment, a problem that could have serious consequences for the society as a whole.
But Zhong Wei, director of the Economic Research Center at Beijing Normal University, believes loosening credit makes no sense. “Loosening credit can only increase the housing vacancy rate,” said Zhong Wei. He says many people think the problem with the real estate market is a shortage of funds, but that is missing the point. “If no one buys houses, developers with more money will build more houses and only make matters worse.”
Disputes on Loosening Policy
Zhong Wei said in a research report that within this year the real estate industry’s fund shortage would reach over 67 billion yuan, and in the coming year it could grow to about 1 trillion yuan. “So this round of real estate market adjustment will last much longer than expected.”
Under these circumstances, many economists, including Gong Fangxiong and Wang Qing, are expecting the government to loosen monetary policy. Wang Qing thinks the government may loosen requirements for loans and reduce interest rates to help to improve housing purchasing power, and stimulate the market.
However, Zhong Wei believes the current housing credit policy is “already very loose”. According to him, since the central bank launched the “second apartment” policy at the end of last year, the rejection ratio for house mortgage loans of commercial banks has remained level. “But what if nobody applies for one?” asked Zhong Wei. The fact is, mortgage loan application rates have fallen at most banks.
Zhong Wei believes the industry is not so much short of money as of demand, and the government lacks effective measures to restore house buyers’ confidence.
As for the suggestions that the government should “save” the market, Ba Shusong, vice director of the Financial Research Institute of the Development Research Center for the State Council, thinks the government should encourage demand by reducing taxes and charges. “During an economic downturn, almost all industries expect the government to loosen credit. But tight macroeconomic policy is a key tone.
Mr. Ba thinks real estate developers must take responsibility for the recovery of their industry. Without house price/ income ratio adjustments, sales will not see a significant rebound, and the market will stagnate.
In fact, all these economists believe that, under current circumstances, cutting housing prices has become the most important measure for the market to save itself. Zhong Wei says the changing consumption demand is closely related to the dramatic price increases in 2006 and, especially, 2007. Developers gained huge profits from the crazy prices. “Now they’ll have to pay back several times more money to survive the market downturn.”
Local Governments Seek to Save the Market
Due to their huge stakes in real estate, some local governments have initiated measures to “save” the market.
In northeast China’s Dalian, the government is planning to adopt a series of policies to “maintain rapid and sound market development.” It is reported that these policies include expanding channels for loans from a housing fund, loosening loans for housing purchases in other cities, and encouraging personal commercial loans. The government is also planning to relieve real estate companies’ fund shortage by introducing new capital into the market and promoting cooperation between banks and real estate developers.
The Fuzhou government is focusing on the land transfer fee. The city’s land management department even suggests that developers should have the right to bargain over the price of lands originally belonging to the government. The government also plans to extend the time limit for the payment of the land transfer fee, exempt value-added tax on common residential homes, and set up a cooperation mechanism between banks and developers to support rational credit demands of qualified real estate companies.
Ba Shusong believes the Chinese economy, which has overly depended on exports with low value-added, is now transforming into a economy whose growth mainly depends on the expansion of domestic demand. Without a strong real estate market, the expansion of internal demand lacks support. Meanwhile, because of their “land finance”-based urbanization, local governments will try everything possible to promote the health of the real estate market.
But Zhong Wei thinks not even god can save the current real estate downturn. Besides the over-construction in recent years, led by ever-rising prices, there has been an erosion of buyers’ wealth. “Many think the stock and real estate markets’ slumps lead only to the shrinking of investors’ book value, but in fact this is not only book value!”
According to Zhong Wei’s estimation, the present stock market slump has cut about 2.3 trillion yuan off stock investors’ wealth, and 1 trillion yuan off fund investors’. “On this basis, the average loss for each stock account is around 20,000 yuan, and that for each fund account about 10,000 yuan. This is money people could have spent on education, medical treatment, or other consumption.”
Zhong Wei says this is only the first year of China’s economic downturn, and the next year will be worse. “The market will only enter a real downturn when land and housing prices are reduced publicly, instead of on the sly. Now is only the beginning.” He also warned developers who are still optimistic about the market and refuse to reduce prices that they “will be further punished by the market.”
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