The sharply rising housing prices, which are beyond the means of many wage earners, point to one thing - an unhealthy real estate market.

This judgment is based on a number of factors.

To begin with, excessively rapid growth of investment in housing is largely responsible for the current general investment overheating, which, in turn, contributes to destabilizing the steady and orderly development of the national economy.

The nation's investment in real estate increased at an annual rate of more than 20 per cent for five years in a row starting from 2000. Though the rate dropped last year, it was still 19.8 per cent.

Long-standing overheating of housing investment not only harms to the real estate market's own sustainable development, but also multiplies financial risks. This is the biggest destabilizing factor affecting macro-economic mechanics.

The overheated real estate market disproportionately triggers large capital input in steel and construction material sectors downstream, giving rise to overcapacity in these sectors and therefore posing hidden peril for the sustainable economic growth in the long term.

In some big cities, local economic prosperity is too dependent on the real estate sector's growth, and this constitutes a major latent danger.

Take Beijing. Housing input has made up nearly 60 per cent of the total investment for a number of years in a row. The figure in Shanghai is in the neighbourhood of 40 per cent.

The high-speed economic growth of the country relies heavily on investment. And the investment, in turn, depends disproportionately on the real estate sector. This is by no means a blessing because housing construction does little to boost the country's industrial and high-tech competitive edge. Not to mention that millions of people have not yet benefited from the continuous real estate boom.

Secondly, overgrowth of the real estate industry can easily lead to so-called "economic bubbles."

The skyrocketing housing prices are in the interest of the investors, developers, buyers who buy on speculation and, in many cases, local governments.

They deem that the higher the housing prices, the more buyers there are. This looks very much like a stock-market craze. But one thing goes unheeded: The bubbles will very likely burst someday when reverse elements happen to be all there.

Industrialization and modernization in China go hand in hand with urbanization. But there will be no urbanization under high housing price.

Some economists and many property developers argue that the accelerating urbanization process is what has driven up housing prices. This, however, is an inversion of the cause and effect.

Excessively high housing prices keep farmers who want to seek employment in cities at arm's length and make it hard for college graduates of rural origins to establish themselves in urban areas.

In this scenario, the urbanization process is hampered rather than facilitated. While the rural population, which makes up the vast majority of the nation's populace, is kept out of the cities, the country in the long run will be robbed of vitality and energy for development.

In addition, the real estate sector is being largely manipulated and wanton speculative acts run unchecked.

Many treat the housing industry as a "super casino" and are eager to profit from it.

All these crazy gambling and speculations have helped drive up the prices, and, in turn, the profits for property developers, making earnest work and real enterprising undertakings pale in terms of making money.

It is a ridiculous, and yet revealing, comparison between a liquefied crystal display TV set and one square metre of an apartment. The former, technology-intensive, is cheaper than the latter, which is made up merely by bricks, cement and steel rods.

Like a huge whirlpool, the high-priced housing sucks people's lifetime savings and a large part of social wealth into it. Presented with this negative model, who is willing to engage in earnest work or blaze new technological trails?

With the central government implementing the policy aimed at keeping housing prices down and putting a brake on the excessive growth of the real estate sector, the overheated land and property market cooled off significantly in 2005. This was mirrored in three respects:

First, the growth rate of housing investment dropped for the first time in six years below 20 per cent. Last year, the total investment in real estate nationwide was 1,575.93 billion yuan (US$194.6 billion), rising by 19.8 per cent year-on-year. Or, the investment growth rate was 8.3 percentage points less than in 2004.

Second, the housing investment increase rate in economically prosperous areas in East China dropped all the more pronouncedly. Real estate investment in Beijing and Shanghai municipalities and Zhejiang Province in 2005, for instance, increased 6.1 per cent, 3.5 per cent and 12.3 per cent respectively last year, declining by 24.3, 19 and 19.9 percentage points over the previous year.

Third, the growth rate of housing prices showed signs of declining, rising only 7.5 per cent last year over 2004, a 1.9 percentage point drop.

This indicates that the government's regulative policy has made some initial effects. But the regulative policy's influences should be projected to medium-term scenarios. Or in other words, the regulation should be continuously carried out. Otherwise, a new round of real estate overheating will be very likely brewed.

Some worrisome symptoms began to show up late last year. In Beijing and Guangzhou, for example, housing sales became hot again and the estate prices started going up sharply, increasing 6.6 per cent in the first quarter in Beijing against the corresponding period of 2005.

There are major forces that could kill the housing regulation policy currently under way.

The banking sector's impulse for investment is extremely strong. This is reflected by the fact that domestic bank loans' share in the investment in real estate expanded by large margins in the first quarter of this year, increasing by 48.5 per cent over the same period of 2005. The investment impulse is explained by a number of factors.

To begin with, there exists a gaping difference between bank deposits and loans. The gap stood at 2,900 billion yuan (US$357.6 billion) last year. As a result, the banks feel strongly pressured to release more loans.

Also, the housing boom covers up potential risks and the bad assets in the sector have not yet told the tale. So banks treat real estate as good assets and extend loans to the sector boldly and with great ease.

Local governments also make up a major force, regarding land and the real estate sector as the key industry to shore up their local economies. As a matter of fact, local governments give the green light to land requisition and other things, which explains why land areas set aside for property development increased sharply nationwide in the latter half of last year and the first quarter of this year.

The last big force is large quantities of speculative money. Together with the other two forces, this kind of capital could impact the real estate market enormously.

Effective management of these types of funds is one of the test stones gauging the level of macro-economic regulation.

In short, the government's long-standing policy goal with regard to the real estate industry should be equalizing tax burdens, bringing housing speculation under control and increasing welfare elements in providing housing.

The author is a senior researcher from the Institute of Macroeconomic Research under the State Development and Reform Commission.

(China Daily 05/17/2006 page4)