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China’s Real-Estate Wrongs

BEIJING – China’s real-estate sector has been a source of serious concern for several years, with soaring property prices raising fears of overheating in the housing market. But, with price growth easing, it seems that the government’s campaign to rein in property risk is finally taking hold. The danger now is that the housing market will collapse – bringing China’s economic prospects down with it.

In its effort to control rising housing prices, China’s government has pursued nine distinct policies, not all of which have served their purpose. Though policies like limits on mortgages for first-time buyers and minimum residency requirements for purchasing property in a first-tier city like Beijing or Shanghai helped to ease demand, supply-side tactics, such as limiting credit to real-estate developers and imposing new taxes on property sales, have proved to be counter-productive.

This flawed approach allowed China’s housing prices to continue to rise steadily, fueling major housing bubbles, especially in first-tier cities. The average Beijing resident would have to save all of his or her income for 34 years before to be able to purchase an apartment outright. In Shanghai and Guangzhou, the equivalent is 29 and 27 years, respectively – much higher than in other major international cities.

The expectation that this trend will continue has driven homeowners to retain possession of their properties, even though rental rates amount to less than 2% of a property’s market value. But, with the real-estate sector finally facing a downturn, the time to rethink this investment strategy has arrived.