By Liu Shengjun

Showdown Stage for Housing Price

Controls
Price controls have had a limited impact on an increasingly polarized, but economically crucial real estate market
The good news is that genuine wealth and vigorous demand are supporting high housing price levels in cities across China. The bad news is that common people can't afford housing that the moneyed class buys and hoards because it's considered a safe, hassle-free investment. Real estate has thus been distributed unevenly in an increasingly polarized society. And steep housing prices clearly manifest the nation's wealth imbalance. The real estate mar et mirrors China's steadily increasing !ini coefficient " a measure of une#ual wealth distribution " which is now more than $.% and rising. The government has tried to address this housing imbalance with policies designed to stifle price growth and encourage affordable housing. &ut these policies have had limited impact because the economy and real estate are intertwined, and local governments rely heavily on property-related revenues. 't's true that the nation's ongoing urbanization process has contributed to higher housing prices. &ut the main factor behind higher housing prices is asset price inflation tied to the increase in personal wealth and sto ed by a rapidly e(panding money supply. &etween )$$) and the end of )$**, the +eople's &an of China's assets increased si( times to ,-. /.% trillion. The 0uropean Central &an as of )$** held about ,-. 1.% trillion, while the ,nited -tates had only about ,-. 1 trillion. 2henever a nation's money supply growth e(ceeds !3+ growth for a prolonged period, e(cess li#uidity is absorbed via asset price inflation. 0#uities and real estate are at the core of the investor asset mar et in China, but the latter has proven far more attractive. 4ne reason is that investor confidence in the stoc mar et has been hurt in recent years by fraud scandals and #uality problems plaguing listed companies. Real estate has thus become important fuel for economic growth, which in China is typically investment-driven. 4f all the mar et factors with the capacity to stimulate investment, real estate is undoubtedly among the most worthy of the tas 5 -ince )$$%, the sector has contributed to more than )$ percent of the nation's !3+. Real estate has also become the 6o. * income source for many local governments. 'n )$*$ alone, land transfer payments by real estate developers provided 78.8 percent of all local fiscal revenue. 9eanwhile, the real estate sector has hi:ac ed the ban ing system5 +roperty-lin ed loans ma e up about )$ percent of all financial system assets, and land-transfer payments by developers are either designed as repayment means or collateral for a large portion of the more than *$ trillion yuan in outstanding loans to local government financing platforms. Policy Shift This chain of influence helps e(plain why government efforts to control housing prices have stalled " so far.

The government in recent years has ordered ban s to tighten lending to property developers and boost deposit-reserve ratios. About two years ago, the government imposed new-home purchase restrictions that pushed large numbers of potential homebuyers to the sidelines. -ince then, facing these conditions, developers have found it hard to get decent returns on their investments. To survive, some have been forced to cut prices. The an(iety is greater among central and local government officials. ;ocal governments have especially borne the pain of real estate mar et controls5 -hanghai's land transfer revenues fell <$ percent in the first #uarter compared to same period last year. -ome governments have sought ways around the control. Against this bac drop, and amid rising fears of a hard landing for the Chinese economy, the central government in the future may rela( real estate mar et controls. 3eteriorating real estate investment contributed to the decline for fi(ed-asset investment overall in April. Real estate investment nationwide rose *<.7 percent between =anuary and April. The increase in April was only >.) percent, though, down %$ percent from the same month )$** and off *$.1 percentage points from 9arch. +rice controls have been blamed for suspensions or cancellations of large numbers of new housing pro:ects, which means new housing supplies are sure to fall over the ne(t few years and push prices higher. 9eanwhile, potential homebuyers continue waiting for their chance to move. +remier 2en =iabao's 9ay )$ announcement that the government would shift policy and support ?stable growth? may have been the right signal for buyers. &ut because housing price issues are sensitive, any ad:ustments by the government in the area of real estate controls will li ely be conducted in an indirect war. @or e(ample, the central ban might reduce the re#uired reserve ratio for ban s and the China &an ing Regulatory Commission might rela( restrictions on real estate lending. Aousing price issues are comple(5 +rices are closely connected to money supply controls and the use of credit to stimulate the economy. -o these problems cannot be resolved in one stro e. &ut because so few people can afford a new home " and society is being divided by an everwidening income gap " the central government has to do something to balance wealth. &alance can be accomplished by reducing ta(es, brea ing up monopolies, reforming stateowned enterprises and imposing an inheritance ta(. ;ocal governments must improve financial transparency. They should also accept new limits to government power. 2ithout changes, local governments will find it hard to brea free of their reliance on landtransfer revenues, and the central government will water down real estate controls so that local governments suffer no more pain. The author serves as honorary president of the China Society of Economic Reform