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It would not be an exaggeration to say that China's housing market has proven resilient to both economic downturns as well as regulatory constraints. The key questions to ask are what supports this resilience and whether the housing market will resist future setbacks.
It is admittedly difficult to generalize about China's housing market. China is a large and diverse country and the different regions are at different stages of development. Nevertheless, there are a few common factors that support the long-term outlook of the housing market.
First, China's private housing market is relatively young, having taken off only in the late 1990s. Demand for private housing is yet to be fully satisfied. By some estimates, less than half the demand of white-collar workers has been satisfied, and there is still large unmet demand from both first-time homebuyers and upgraders, which lends underlying strength to the urban housing market.
Second, people's incomes have benefited from several decades of strong economic growth. Although housing prices have risen rapidly in some cities, incomes have also risen. Affordability had declined in some cities where house prices rose faster than income, but the divergent trend has been tempered by the 2011-12 downturn. In key cities such as Beijing and Shanghai, nominal growth in disposable income per capita in 2012 remained high at around 11 to 12 percent year-on-year while property price increases were more subdued.
Third, urbanization will likely continue and even accelerate in some cities, offering support for the housing market.
Fourth, a typical homebuyer, especially a first-time buyer, tends to rely heavily on savings and less on financing. China's large household savings pool thus mitigates potential risks of over-leveraging in the housing market.
Having outlined some favourable factors that underline the sector's long-term fundamental support, this does not mean of course that the housing market will only go up. Corrections in prices have happened before and will happen again. Housing market prices have been generally determined by supply and demand.
But the government has some extra levers. These are applied through its control of land supply, administrative measures such as tax and the adjustment of the rules for bank lending, as well as monetary policy involving money supply and interest rates. The central government appears to have two key objectives with regard to the housing market: preserving macro-economic stability and providing low-cost housing.
Therefore, policies put in place to ensure that house prices do not rise beyond the reach of genuine homebuyers and that these get adequate access to financing are sensible. The latest round of policies has targeted speculative buyers. High-end housing tends to come under greater impact of reduced affordability and scarcity of financing. During the last downturn, it was encouraging to see that developers have become more savvy, adjusting prices rather nimbly and building liquidity buffers for lean times.
As the economic outlook brightens, it will not be surprising if house prices continue to recover. The important thing is to ensure that the rise in house prices does not diverge widely from income growth. In this regard, existing measures to guard against excessive speculation are already in place. Prudential regulations should also concentrate on containing systemic risks, for example, ensuring that mortgage loans are properly assessed to avoid a subprime-style housing bust like the one in the United States. Thus far, the signs are encouraging with mortgage default rates during the past downturn remaining low.
Policy this year will likely be geared toward managing the upturn. Since the authorities' objectives are to preserve macroeconomic stability and ensure the affordability of low-cost housing, interfering with market forces will not serve their purpose. Measures are likely to resemble those introduced in the past, mainly to discourage speculation.
During the growth downturn in the early part of 2012, the authorities stood firm against lifting the curbs against speculators. One can deduce that the anti-speculation measures are not going to be loosened during the upturn and may even be tightened.
This has been affirmed by the five key policy directions that Premier Wen Jiabao laid out at the State Council, China's cabinet, executive meeting held on Feb 20. Restrictive measures may not necessarily impede further rises in house prices, but they can effectively slow the pace of growth. As long as increases in house prices are consistent with the economic cycle and income developments, systemic risks should be contained.
The large unmet demand of aspiring homeowners acts like the wind behind the sail for the housing market. The best approach is not to shield the housing market from a correction nor to engineer an artificial rise in prices, but rather to smooth the cycle and wring out the excesses. So far, China has achieved that. The challenge is to continue doing it.
The author is a senior economist with Deutsche Bank.