This is no time to take foot off brake

Updated: 2011-10-28 10:52

By Ma Guangyuan (China Daily European Weekly)

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This is no time to take foot off brake

Ren Xiaoshi/ For China Daily

Housing developers looking to safeguard huge profits should be given short shrift

As expected, the traditional "golden September and silver October" peak sales season did not materialize in the country's housing market in the wake of a series of what some have branded as highhanded regulatory measures by the government.

The Beijing branch of China Construction Bank announced in mid-October its plan to raise mortgage interests for first-time homebuyers 1.05 times on benchmark rates, in a move considered another heavy blow to dampened domestic real estate market. According to media reports, 14 cities across China announced similar decisions, raising mortgage lending rates for first-time homebuyers by between 5 percent and 30 percent and even by as much as 50 percent. This is widely being regarded as the last straw for developers.

In fact, Shanghai and Hangzhou, capital of developed Zhejiang province, successively raised such rates earlier this year following the adoption of ever-tightening government regulations, from the removal in 2008 of a 30 percent or 15 percent discount on benchmark rates, which was aimed at boosting the national economy by activating the housing market amid the global financial crisis, to the resumption of benchmark rates later and then the latest adoption of raised interest rates.

The 5-30 percent rise on the benchmark level means homebuyers would have to shoulder a similar rise. Such a move is equivalent to commercial banks casting a veto on the trend in the real estate market. Considering the long-established "iron triangle" with local governments and developers, the decision to raise mortgage rates at a time when the country's real estate regulations reach a critical point shows commercial banks' pessimism about the future of the domestic property market and a widening divide emerging in the established chain of interests among the various interest groups.

Commercial banks' ever-growing desire to pull themselves out of the alliance of interests they have previously forged with local governments and developers suggests that the turning point on domestic housing prices is not far off.

At the moment psychological and power rivalry between developers and consumers is changing substantially - to the latter's advantage. After more than a year of policy lever pulling by the government, the housing investment fever has obviously subsided. As a result, the volume of housing transactions has fallen drastically.

In Beijing, Guangzhou, Shanghai and other first-tier cities, the volume of home transactions has been at a three-year low. The prices of newly built houses in 17 of 70 big and middle-sized cities fell in September compared with August, and prices have stopped rising in most other cities. The number of unsold houses in many cities has also reached a new high.

What's more, the funding crunch many developers have suffered will push them to the brink of bankruptcy if they continue refusing to cut prices. In the cities in which housing prices had soared in recent years, prices have already fallen to 2009 levels.

However, regulating the real estate market is never as easy as it may look, so there should be no premature congratulatory backslapping. The risk of a new round of global economic recession triggered by the sovereign debt crisis in the United States and Europe has raised expectations among domestic developers that the regulatory regime will be watered down or put on hold.

Local governments' long-held overdependence on revenue drawn from land sales has also bolstered developers' confidence that they can stick to the current high prices despite the increased pressures they face. For example, after data was published from last month showing that national economic growth had further slowed, some market analysts called on the authorities to relax monetary tightening policies to avoid a "hard landing" of the national economy.

At a time when nationwide housing prices have failed to fall greatly, any hint of monetary relaxing is likely to strengthen the resolve of desperate developers to stick to high prices so they can reap the profits.

Excessive dependence on the housing market will expose the economy to a serious risk of collapse. Based on that consensus, Premier Wen Jiabao, in an article published in last month's issue of Qiushi magazine, said unambiguously that the country's determination to press ahead with real estate regulations will "never waver", its policy direction will "never reverse" and policy intensity will "never relax".

The author is an economist with the Chinese Academy of Social Sciences.