Rational Thought on China's Housing Price

Essay by monica8982000University, Bachelor'sB+, February 2008

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The housing system in urban China is now undergoing a process of transition from the planned economy to a market oriented one. The housing policy is one of the most popular topics under public discussion. The housing price growth in China has become a severe issue because the price is not only increasing fast but also high in absolute value. The writing provides some basic information about the current situation of the housing market in China, making an analysis of the housing situation and giving a brief review of the recently implemented housing policies.

China's current housing situationThe economic reforms carried out and the open door policies started in 1978 have resulted in a rapid housing construction in urban and rural areas. Significant achievements are being secured in improving human settlements.

The essence of Chinese economical reform has improved the efficiency of resource allocation1 and released the economy energy through adjusting the allocation way on the three main factors of labor, capital and land.

Excessive liquidity2 in China results in the country's prosperity under current economic pattern. With the development of economy, excessive liquidity leads to Chinese assets price rise which starts from the real estate3.

According to the State Statistical Bureau's investigation, from January to November in 2007, for the whole country, the real estate market presented three characteristics: firstly, the demand continued to go up, secondly, the property developers speeded up the investment on it, and thirdly, the rate of rise is highly.

The statistics demonstrated that residents in the 70 large and middle-sized cities across the country still saw a price increase of 7 percent in 2007. In some big cities such as Beijing and Shenzhen, the housing price even has risen by more than 10 percent. Many people have to reduce their expenditure4 on other commodities to buy houses earlier than they originally planned. As a result, China's consumption rate has reached new low of 36 percent of the Gross Domestic Product5 (GDP) last year, compared with the figures in the past 10 years.

Three factors boost the housing priceActually who is boosting the new turn of the explosive house price? The following are three reasons of it explaining the current situation:The distorted6 system of land. Currently the distorted system of land in China has already become an important factor which influences the problem of price of house property. The supply of real estate has been insufficient due to the extremely strict land control ever since April 2004. In the circumstance of supply shortage, high-end demand was met first. Furthermore, the government's monopolization7 in urban land leads to the housing price hike.

Demand and supply. There is a strong demand for housing during the course of high-speed civilization. Distinctly, this strong demand is in part pushed upwards by non-local investors and those who have their household registered in other areas with relatively high income, but the most dynamical8 drive is from the urban workforce with middle income. On the other hand, the supply of real estate has been insufficient year by year since the land control in the new century, especially since the extremely strict control in 2004. So there is only a seller's market in the circumstance of supply shortage in the housing market. Its character is extremely high price.

Low interest rate policy. In China, its economic set-up is still in transition from the planned economy to a market oriented one; the price mechanism is still at the core of the general economic operation. Currently, many problems in the Chinese economy have their roots in the low interest rate policy.

It leads to overheating in fixed asset investment and excessive growth in the country's favorable trade balance. In the context of low interest rates, it is profitable for investors to borrow money from the bank. The investors, who borrow low-cost money, feel no restraint from investing in high-risk projects. The capital easily flows into the economic operations, particularly the real estate market. Under such circumstances, it is only natural that the real estate prices keep soaring.

Government policiesWhen most of the urban residents are financially troubled in paying for housing, social stability is threatened. Therefore it is essential for the government to take measures to solve the problem. But how to guarantee the effectiveness of the policies should be thoroughly considered.

The enhancement of the government's role in the housing market does not neglect the market mechanism. On the contrary, administrative functions can merely play an active role when they follow market rules.

To solve the housing price problems in China, a series of policies have been implemented by the Chinese government. Since the Mid 1990s, the government has been tried solving the housing problems of low-income households and has made great achievements. It has launched many policies in succession, like Welfare Housing Project, Affordable Housing Policy, Low-rent Housing Policy, etc. Meanwhile, according to the official report, the central bank has ordered commercial banks to raise mortgage9deposits to at least 40 percent for homebuyers who intend to buy a second apartment. Homebuyers have to make a down payment of 40 percent to buy a second apartment, including the apartments for commercial use; the down payment will be raised to as high as 50 percent.

On the one hand, the central bank has also increased the interest rate of mortgage loans to 1.1 times the benchmark10one-year lending rate; On the other hand, the central bank also required the commercial banks to stop lending money to property developers who hoard11 lands and houses for speculation12 purpose, according to the source.

These adjustments follow market rules. It remains important to increase competition among the suppliers in the larger property market. The government should allow more modes of housing construction so that a multi-layer market will be formed to meet the needs of different groups of people.

Future trendCould the housing prices begin to fall in 2008? It seems unlikely. First of all, supply is still scarce. Land resources in the major cities remain limited and the real estate developers flushing with cash from the recent housing boom are continuing to buy much of the remaining land, pushing land prices higher than the actual cost of houses. Therefore they will continue to boost prices for their properties in order to cover costs. In addition, some experts estimate that one of the important factors impacting the housing price is the 2008 Beijing Olympic Games, which may attract more foreigners to buy houses in China. The government is also likely to adopt a tight monetary policy in 2008, which will raise the cost of houses and land in the long-term.

Controlling house price hike and guaranteeing its people's living standard has become one of the Chinese government's primary concerns. Since China adopted macro-control over the real estate market last year, the increasing investment in the sector and price hikes were reined initially. But the market will still have the final say. At the beginning of 2008, in these big cities, such as Shenzhen, Guangzhou, Beijing and Shanghai, the housing price has been going down, which leads to a quick reaction of the public. Most people postpone their house-buying plans until the market is clearer.