House market needs regulation
(China Daily)
Updated: 2005-03-31 08:48

It is time for the government to intervene in the redhot housing market, otherwise it runs the risk of spiralling out of control.

For many would-be urban home buyers, their dream of owning a home continues to disappear as house prices surge nationwide.

Some economists attribute the surging prices to inadequate supply in the market, arguing that prices will fall as supply increases.

This is in line with classic economic theory that says that in a competitive market, as supply goes up prices usually go down.

However, as a special commodity, such a rule may not work in the housing market in China.

Housing is not a consumer good, but an investment, a feature that makes its price-setting mechanism markedly different from other commodities.

There exists no price equilibrium in the investment goods market. The price of such a good is usually decided by its expected returns.

Housing is a quasi-public good and has a social dimension. The government is usually responsible for providing public goods.

In China, sweeping urbanization in recent years has led to an explosion in the urban population and a severe shortage of housing in many cities.

In order to solve these problems, the government has to step into the property market because housing development and other public infrastructure projects are part of the government's overall planning strategy.

The negative effects resulting from real estate developers' market segmentation strategy is another reason why the government needs to intervene in the housing market.

Market segmentation is a strategy used by enterprises to tailor their products to different consumers or different market layers in order to maximize returns.

Low-income group's low purchasing power often leads them to be ignored by the market, which tends to favour high-income groups.

This is the case in the housing market.

In order to guarantee low-income families' housing needs, the government should provide them with low-rent homes, economy housing or set up a housing security system.

In this sense, the government's intervention in the housing market would not only better optimize social resources, but also be conducive to achieving social justice.

The current housing market also makes government intervention a pressing task.

The property market has witnessed four consecutive years of sizzling growth since 2001. Investment has risen sharply and, despite soaring prices, housing sales are also brisk.

In many cities, the amount of housing sold is more than the housing that is being built, lowering the vacancy rate.

But neither investment or sales volume should be used as a reference point to judge whether the housing sector is overheating, nor should the gap between demand and supply be similarly used.

Unlike ordinary commodities, housing usually involves huge amounts of credit, both for developers and for home buyers.

The current brisk house sales and good returns does not necessarily mean ultimate returns will be as good.

The current boom will spur developers to build more homes which may exceed future demand in the market, resulting in a glut.

So individuals and developers could end up with a huge amount of bad bank loans.

For the property industry, the growth of urban residents' disposable income should serve as the reference point when making building decisions.

If this growth of disposable income and the amount of housing available are not parallel, it could mean the real estate industry is not sustainable, or that spending on house buying is affecting other forms of consumption.

This is what is happening in the country now.

House prices in some cities such as Beijing, Shanghai and Hangzhou have shot up wildly to a degree that they are now way beyond ordinary people's reach.

This is a phenomenon that should be taken seriously.

According to the National Bureau of Statistics (NBS), urban residents' disposable income grew annually by 10 per cent on average from 2000 to 2003. House sales increased annually by 30 per cent on average during the same period.

In 2003, total house spending as a portion of total urban residents' disposable income amounted to 16.7 per cent, a figure that was higher than America's in 1999, which was 13.65 per cent.

If there is not prompt and powerful government intervention, a serious housing bubble will be in the making.

And exorbitant, rising house prices will worsen the lives of those newly settled in our cities.

But what should the government do?

It is recommended that a special body should be set up to handle the public housing issue.

One model is the Hong Kong Home Authority, a quasi-official agency which is responsible for determining and implementing public housing programmes.

A similar body could be tasked to protect low-income groups when the government's economic development target is at odds with the public housing system.

The government could consider the following immediate measures:

A high rate of tax could be levied on house buying to curb property speculation.

A house market information network should be set up.

A transparent information system could effectively prevent the market from being manipulated by some players.

The government's policy on tightening land management should be strictly followed to the letter.

The government should increase the supply of public housing for low-income groups.

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