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Fall of house prices

(China Daily)
Updated: 2008-10-17 15:35

Local governments' efforts to help lift the ailing property market can hardly stop house prices from coming down further. Nor should they intend to do that.

The ongoing correction of domestic housing prices is necessary to squeeze out bubbles to ensure long-term, healthy development of the property sector and the national economy at large.

It was reported that a number of major Chinese cities have recently moved to boost local real estate markets with various policies. Some decided to offer a subsidy for home-buyers; others cancelled restrictions on a second private property or reduced property tax.

All these measures show that local governments are greatly concerned over the severe impact that falling housing prices may exert upon not only the property sector but also the overall development of their economies.

The growth rate of property prices in 70 major Chinese cities has dropped for eight months in a row this year, confirming a nationwide decline after a two-year surge. Developers across the country have found it increasingly difficult to sell houses and became reluctant to open new property projects. As a result, the country is witnessing a deceleration in the growth of property-related fixed-asset investment while a looming global slowdown makes it urgent for China to rely more on domestic demand for economic growth.

Under such circumstances, it is justified for the government to relax its policies on real estate to prevent further sharp drops in fixed-asset investment, given the housing market's influence on employment, taxation, and many other aspects.

However, when designing loosening initiatives on real estate policies, especially when public funds are involved, the authorities should be careful enough not to blur the difference between boosting property development investment to fuel economic growth and holding up house prices to save fund-thirsty developers. Since revenue growth of local governments is closely related to the boom of local real estate markets, policymakers must refrain from helping developers at the expense of the public. In other words, local governments should make it clear that they will not intervene in the adjustment of house prices.

Further fall of house prices will be painful for developers as well as homeowners who suffer a loss in the value of their houses. But the correction is needed to narrow the gap between housing prices and the real purchasing power of most people.

China's urbanization drive surely necessitates a long boom of the domestic real estate market. But such a healthy property boom lasts only when houses are priced according to the income level of the majority of potential buyers.