Government intervention in the sagging property market, regardless of motive, sends the wrong signals and delays reform.
By Hu Shuli, Caijing 3 February 2009
A near-term focal point for the Chinese economy is the nation’s sliding property market and a subsequent ripple effect. How should the government react as the downturn picks up speed? Should it intervene in what is actually a cyclical adjustment for the property market?
Opinions are divided. And the divisions are deepening, driving a wedge between government policymakers and the market, central and local government officials, and government leaders at local levels.
Separating the views of central and local governments are, for the most part, vested interests and policy goals. The central government worries about financial system risk during a cyclical adjustment, as well as the negative impacts of a weakening property market on the overall economy. Local governments are troubled by falling revenues as land prices and property investments slump.
Meanwhile, property developers and consumers are at a standoff. Some property developers, betting on government support, are holding back potential price cuts, while would-be buyers wait as well, biding their time.
We think the market itself is divided over government policies. One reason is that rash steps taken by some local governments determined to “save the market” have sent the wrong signals. From this point forward, however, this “visible hand” of government involvement must behave with restraint.
The government, seeking a long-range and prudent stance, should give the market time and space to heal itself. The property market is going through an adjustment period. It’s a stage that’s part of a normal cycle, based on market logic. A reasonable adjustment will squeeze out the bubble and reduce financial risks.
At present, the government is using interest rate cuts and an eased credit policy to stimulate demand and alleviate the pain of adjustments. It should focus on building subsidized housing to meet the needs of low-income families. Government investment in this type of housing can create jobs and attract investment in the property market, which will offset negative impacts of the downturn and stabilize the economy. But outright intervention to prop up prices and business activity, regardless of the motives, will distort price signals and leave room for rent-seeking.
Since China launched housing reform in 1998, the property market has thrived, and housing conditions for middle- and upper-income urban residents have improved remarkably. However, the government has not done much to provide housing for low-income families. The current cyclical downturn, marked by dwindling private investment, is an opportunity for the government to do its job. It has ample fiscal resources and the means to serve people.
To be sure, a sound road map is needed for a low-income housing program. Of paramount importance is to clearly define eligibility and separate subsidized public housing from commercial residential property. Design, planning and prices should be kept separate. Most subsidized housing, principally built with government funding, should be made available to renters, but individuals who put their own money into homes should obtain “partial property rights.”
The current hybrid government-commercial models that have created so-called “economy housing” and “price-controlled housing” should be changed or abandoned. Only by changing course can the government protect future subsidized public housing programs from morphing into phony “welfare” housing for a privileged few and tools for speculators.
Another issue is local government reliance on revenues from land sales, which have swung wildly with the property market. Governments benefited from soaring prices during a bull market that began in 2006. But along with property developers, they helped drive property prices to unsustainable heights.
Thanks to conservative borrowing by Chinese consumers, the nation has not been hit by a U.S.-style sub-prime lending crisis. Yet market volatility will inflict considerable pain anyway. Therefore governments, while balancing their many roles, should reconsider and ultimately end their dependence on the land-sale revenue system. This is an item for the reform agenda.
After governments are weaned from land sales as revenue sources, taxation should be used to raise funds for public spending. Changing the land requisition system and letting people share the profits will increase the willingness to spend among Chinese consumers, which in turn will help put the economy back on track.
Land as well as housing in China share public and private attributes. Sometimes it’s difficult to distinguish between the two. History blurs the line; the nation has a long tradition of strong administrative power, but the property market is only about a decade old. The distinction should be clarified, however, as part of the economic reform process.
Turning the government’s attention to housing market problems can stimulate domestic consumption as well as include the government in people’s everyday lives. Cultivating such relations is enormously important. At the same time, government officials should approach the many facets of property market reform with clear minds and reject the temptation to lay groundwork for difficult predicaments in the future. This visible hand must keep its place in the framework of reform.
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Hands Off China’s Cyclical Property Market
Government intervention in the sagging property market, regardless of motive, sends the wrong signals and delays reform.
By Hu Shuli, Caijing
3 February 2009
A near-term focal point for the Chinese economy is the nation’s sliding property market and a subsequent ripple effect. How should the government react as the downturn picks up speed? Should it intervene in what is actually a cyclical adjustment for the property market?
Opinions are divided. And the divisions are deepening, driving a wedge between government policymakers and the market, central and local government officials, and government leaders at local levels.
Separating the views of central and local governments are, for the most part, vested interests and policy goals. The central government worries about financial system risk during a cyclical adjustment, as well as the negative impacts of a weakening property market on the overall economy. Local governments are troubled by falling revenues as land prices and property investments slump.
Meanwhile, property developers and consumers are at a standoff. Some property developers, betting on government support, are holding back potential price cuts, while would-be buyers wait as well, biding their time.
We think the market itself is divided over government policies. One reason is that rash steps taken by some local governments determined to “save the market” have sent the wrong signals. From this point forward, however, this “visible hand” of government involvement must behave with restraint.
The government, seeking a long-range and prudent stance, should give the market time and space to heal itself. The property market is going through an adjustment period. It’s a stage that’s part of a normal cycle, based on market logic. A reasonable adjustment will squeeze out the bubble and reduce financial risks.
At present, the government is using interest rate cuts and an eased credit policy to stimulate demand and alleviate the pain of adjustments. It should focus on building subsidized housing to meet the needs of low-income families. Government investment in this type of housing can create jobs and attract investment in the property market, which will offset negative impacts of the downturn and stabilize the economy. But outright intervention to prop up prices and business activity, regardless of the motives, will distort price signals and leave room for rent-seeking.
Since China launched housing reform in 1998, the property market has thrived, and housing conditions for middle- and upper-income urban residents have improved remarkably. However, the government has not done much to provide housing for low-income families. The current cyclical downturn, marked by dwindling private investment, is an opportunity for the government to do its job. It has ample fiscal resources and the means to serve people.
To be sure, a sound road map is needed for a low-income housing program. Of paramount importance is to clearly define eligibility and separate subsidized public housing from commercial residential property. Design, planning and prices should be kept separate. Most subsidized housing, principally built with government funding, should be made available to renters, but individuals who put their own money into homes should obtain “partial property rights.”
The current hybrid government-commercial models that have created so-called “economy housing” and “price-controlled housing” should be changed or abandoned. Only by changing course can the government protect future subsidized public housing programs from morphing into phony “welfare” housing for a privileged few and tools for speculators.
Another issue is local government reliance on revenues from land sales, which have swung wildly with the property market. Governments benefited from soaring prices during a bull market that began in 2006. But along with property developers, they helped drive property prices to unsustainable heights.
Thanks to conservative borrowing by Chinese consumers, the nation has not been hit by a U.S.-style sub-prime lending crisis. Yet market volatility will inflict considerable pain anyway. Therefore governments, while balancing their many roles, should reconsider and ultimately end their dependence on the land-sale revenue system. This is an item for the reform agenda.
After governments are weaned from land sales as revenue sources, taxation should be used to raise funds for public spending. Changing the land requisition system and letting people share the profits will increase the willingness to spend among Chinese consumers, which in turn will help put the economy back on track.
Land as well as housing in China share public and private attributes. Sometimes it’s difficult to distinguish between the two. History blurs the line; the nation has a long tradition of strong administrative power, but the property market is only about a decade old. The distinction should be clarified, however, as part of the economic reform process.
Turning the government’s attention to housing market problems can stimulate domestic consumption as well as include the government in people’s everyday lives. Cultivating such relations is enormously important. At the same time, government officials should approach the many facets of property market reform with clear minds and reject the temptation to lay groundwork for difficult predicaments in the future. This visible hand must keep its place in the framework of reform.
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