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China’s Real Estate Misstep

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China Power

China’s Real Estate Misstep

China may be loosening government restrictions on the property market too quickly. Structural issues remain.

Chinese Premier Wen Jiabao has repeatedly said that China won’t loosen government restrictions on the property market until it has reached acceptable price levels. 

However, the government recently announced plans to do just that: the People’s Bank of China cut banks’ reserve requirements from December (the first cut since 2008) by 50 basis points to promote lending, and BNP Paribas SA expects to see additional reductions after the Lunar New Year. New loans in December increased to $101 billion, the highest monthly figure since April, exceeding economists’ expectations.

This loosening of monetary policy is ostensibly aimed at lightening the burden on the real estate market, which had slowed due to a program of government restrictions over the past year or so.

For example, as Tsinghua University Prof. Patrick Chovanec notes in his blog, new home prices in Beijing fell 35 percent in November, while developers have begun offering discounts as high as 50 percent.

That being said, the situation in the nation as a whole isn’t so dire.  As Jack Perkowski notes in his post over at Forbes, a quick look at the China Real Estate Index System, which measures real estate prices in 100 Chinese cities, finds that prices haven’t dropped as precipitously as many think.  The lowest average price in 2011, in November, was 8,832 yuan per square meter. This price was just 0.28 percent lower than October’s figure and just 0.14 percent lower than the second lowest yearly value in May.

A December report by the Agricultural Bank of China indicates that the central government still has a long way to go before reaching reasonable real estate price levels, estimating that first-tier cities need to drop prices 10 to 25 percent and second-tier cities need to decrease prices by 5 to 15 percent.  

Additionally, while the phenomenon is likely overblown by Western commentators, ghost cities full of purchased but empty apartments do exist, and shadow lending remains a problem.

The fact is, the structural factors that have led to a property bubble haven’t changed – real estate is still the best mode of investment given the volatile stock market and capital controls, cultural pressures to become a homeowner remain as strong as ever and rapid urbanization continues. Though a bond issuance plan has been set in motion, local governments still rely heavily on real estate revenues, and often take steps to protect developers and real estate development: just recently, several municipalities were reported to have dropped a requirement that developers construct a certain percentage of affordable housing on their purchased land.

In short, the real estate market isn’t cool enough to warrant loosening monetary policy, and if this trend continues, real estate prices could bounce back to their previous levels. 

Without addressing these structural issues, real estate prices will continue to rise, and government restrictions will remain necessary.

Eve Cary is a researcher at the Brookings Institution in Washington.