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Thursday, 3 March 2011
Property controls distort the market
After several unsuccessful attempts to rein in runaway housing prices, the central government has resorted to restricting home purchases in the hope of dealing the “killer blow” to cool the market.
After several unsuccessful attempts to rein in runaway housing prices, the central government has resorted to restricting home purchases in the hope of dealing the “killer blow” to cool the market.
Just before the Lunar New Year, the State Council announced eight measures targeted at the red-hot property market, including raising the minimum down payment and lending rates for buyers of a second home. It also called on major cities - including all municipal cities and provincial capitals - and cities where housing prices are too high or have surged too rapidly, to set rules to restrict home purchases.
City governments one after another have taken action. On February 16, the Beijing municipal government introduced its version of the rule. Under its 15 measures, a Beijing family that already owns one flat can buy only one more, while a non-local family in the capital city cannot buy even one, unless it has a valid temporary residence permit and can prove it has been paying social security or income tax for at least five consecutive years. If a non-local family - that is, a family that is not registered under the city’s hukou - fulfils these criteria, it can buy a new or second-hand property.
More than 12 second-tier cities and some third-tier cities have also introduced similar rules, which differ only in their stringency.
The State Council’s latest efforts underscored its determination to prevent an asset bubble forming. But while its intention is commendable, the plan, by allowing local governments to interpret the State Council’s edict, can lead to arbitrary and inappropriate measures. Restrictions on home purchase have proved ineffective in the past. Worse still, they run counter to market principles and could undermine the government’s credibility; it is hard to predict or control their impact.
Beijing’s move has sparked complaints of unfair treatment from its non-local residents and concern among economists, even as potential homebuyers and property developers try to work out how they can circumvent or counter the rules.
But the policy has also won some support from the media and the public, not least because it seems to have worked: since its introduction, transaction volumes have dropped sharply and the price surge is also levelling off.
However, this fall in sales is temporary and superficial. It is not inadequate enforcement that stops limits on home purchases working; it is because they go against fundamental economic laws. Prices are determined by supply and demand. Local governments may have tried to redirect housing demand, but they cannot eliminate it. On the supply side, the government’s aim to increase affordable housing for low-income groups is a long-term target that cannot possibly meet the needs today. Yet, at the same time, it is holding back the development of private housing by tightening approval for pre-sale permits and restricting developers’ funding sources. By doing so, it worsens the imbalance of supply and demand.
In the face of new cooling measures, experienced property developers usually adopt a wait-and-see stance. Hence, the immediate drop in transaction volume. But, as the gap between supply and demand widens, prices will surge in retaliatory fashion every time restrictions on purchases are relaxed. These repeated “bounces” will render the government’s efforts useless and its credibility will suffer.
Some academics argue that restriction orders may still work as a temporary measure, but we disagree. Property development on the mainland is already out of sync with demand, so steady development is a must. While the government can and should consider individual measures to curb speculation, such as setting tax record requirements for potential buyers, it should not issue blanket orders to restrict home buying. The fact it has done so reflects a lack of independent oversight, and a failure to adhere to fact-based decision-making or respond to the people’s desire for democracy.
The strict definition and enforcement of property rights, their free transfer, and a system that honours and protects such transfers, are the hallmarks of a market economy. In such a market, buyers and sellers are free to negotiate a deal; the government is wrong to interfere by setting restrictions on who can take part and how much they can buy.
It is also alarming that some governments have used the household registration system as the basis for their restriction orders. A legacy of the planned economy, the hukou system in fact props up the “urban-rural divide” that is a cause of major social problems today. The central government has been making efforts to reform the system since 2008. Yet, despite this general trend, some local governments seized on this outdated tool to implement the restriction order, ignoring the social costs it entails.
In the face of surging property prices, the government can and should do something. For example, it should reform the land and tax systems, deepen its pilot property tax scheme and end local governments’ reliance on the sale of land for funds. It must also step up efforts to provide affordable housing, and tighten its loose monetary policy. But, instead, it is trying to resolve macroeconomic problems through microeconomic means, risking a repeat of the central planning mistake of forcing through a “short-term, stable, quick” policy.
The people are right to question the goals of the restriction orders. It has been 20 years since China took its first formal steps towards building a market economy. Its latest rules to curb property speculation are, according to the State Council, also aimed at the “stable and healthy development of the property market”. Given this goal, the authorities should be more careful in choosing policies to resolve the housing problems. Market principles should not be ignored, and using inappropriate measures to tackle the problems can have disastrous consequences.
2 comments:
Property controls distort the market
Hu Shuli
03 March 2011
After several unsuccessful attempts to rein in runaway housing prices, the central government has resorted to restricting home purchases in the hope of dealing the “killer blow” to cool the market.
Just before the Lunar New Year, the State Council announced eight measures targeted at the red-hot property market, including raising the minimum down payment and lending rates for buyers of a second home. It also called on major cities - including all municipal cities and provincial capitals - and cities where housing prices are too high or have surged too rapidly, to set rules to restrict home purchases.
City governments one after another have taken action. On February 16, the Beijing municipal government introduced its version of the rule. Under its 15 measures, a Beijing family that already owns one flat can buy only one more, while a non-local family in the capital city cannot buy even one, unless it has a valid temporary residence permit and can prove it has been paying social security or income tax for at least five consecutive years. If a non-local family - that is, a family that is not registered under the city’s hukou - fulfils these criteria, it can buy a new or second-hand property.
More than 12 second-tier cities and some third-tier cities have also introduced similar rules, which differ only in their stringency.
The State Council’s latest efforts underscored its determination to prevent an asset bubble forming. But while its intention is commendable, the plan, by allowing local governments to interpret the State Council’s edict, can lead to arbitrary and inappropriate measures. Restrictions on home purchase have proved ineffective in the past. Worse still, they run counter to market principles and could undermine the government’s credibility; it is hard to predict or control their impact.
Beijing’s move has sparked complaints of unfair treatment from its non-local residents and concern among economists, even as potential homebuyers and property developers try to work out how they can circumvent or counter the rules.
But the policy has also won some support from the media and the public, not least because it seems to have worked: since its introduction, transaction volumes have dropped sharply and the price surge is also levelling off.
However, this fall in sales is temporary and superficial. It is not inadequate enforcement that stops limits on home purchases working; it is because they go against fundamental economic laws. Prices are determined by supply and demand. Local governments may have tried to redirect housing demand, but they cannot eliminate it. On the supply side, the government’s aim to increase affordable housing for low-income groups is a long-term target that cannot possibly meet the needs today. Yet, at the same time, it is holding back the development of private housing by tightening approval for pre-sale permits and restricting developers’ funding sources. By doing so, it worsens the imbalance of supply and demand.
In the face of new cooling measures, experienced property developers usually adopt a wait-and-see stance. Hence, the immediate drop in transaction volume. But, as the gap between supply and demand widens, prices will surge in retaliatory fashion every time restrictions on purchases are relaxed. These repeated “bounces” will render the government’s efforts useless and its credibility will suffer.
Some academics argue that restriction orders may still work as a temporary measure, but we disagree. Property development on the mainland is already out of sync with demand, so steady development is a must. While the government can and should consider individual measures to curb speculation, such as setting tax record requirements for potential buyers, it should not issue blanket orders to restrict home buying. The fact it has done so reflects a lack of independent oversight, and a failure to adhere to fact-based decision-making or respond to the people’s desire for democracy.
The strict definition and enforcement of property rights, their free transfer, and a system that honours and protects such transfers, are the hallmarks of a market economy. In such a market, buyers and sellers are free to negotiate a deal; the government is wrong to interfere by setting restrictions on who can take part and how much they can buy.
It is also alarming that some governments have used the household registration system as the basis for their restriction orders. A legacy of the planned economy, the hukou system in fact props up the “urban-rural divide” that is a cause of major social problems today. The central government has been making efforts to reform the system since 2008. Yet, despite this general trend, some local governments seized on this outdated tool to implement the restriction order, ignoring the social costs it entails.
In the face of surging property prices, the government can and should do something. For example, it should reform the land and tax systems, deepen its pilot property tax scheme and end local governments’ reliance on the sale of land for funds. It must also step up efforts to provide affordable housing, and tighten its loose monetary policy. But, instead, it is trying to resolve macroeconomic problems through microeconomic means, risking a repeat of the central planning mistake of forcing through a “short-term, stable, quick” policy.
The people are right to question the goals of the restriction orders. It has been 20 years since China took its first formal steps towards building a market economy. Its latest rules to curb property speculation are, according to the State Council, also aimed at the “stable and healthy development of the property market”. Given this goal, the authorities should be more careful in choosing policies to resolve the housing problems. Market principles should not be ignored, and using inappropriate measures to tackle the problems can have disastrous consequences.
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