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Affordable houses for low-income residents

By Yi Xianrong (China Daily)
Updated: 2008-11-24 14:36

The central and local authorities have taken a raft of measures in an attempt to expand domestic housing demand and boost the sluggish real estate market.

In the context of the aggravating international financial tsunami, these measures are also expected to tap the enormous domestic demand potential for a steady economic growth to help the country survive the upcoming global economic cold.

The government has long held that a booming real estate industry should help to solve and improve ordinary people's basic accommodation conditions.

On Oct 30, the People's Bank of China, the country's central bank, made a decision to lower the benchmark lending and depositing interest rates for domestic financial bodies. It also decided to lower housing transaction taxes and extend a preferential interest rate to ordinary self-accommodating purchasers. Days later, the State department in charge of the country's housing fund also announced its decision to raise conditional home buyers' maximum loan amount to 1.2 million yuan in some regions.

All these moves demonstrate the authorities have made solving ordinary people's housing problem a top priority.

They are by no means the only government plans to rescue the staggering real estate sector faced with the hovering housing prices.

It has long been the central government's clear-cut stance that it will build more subsidized low-priced and low-rental houses to meet the basic accommodation needs for low-income residents.

At the same time, the housing problem of other residents will be solved through the market mechanism.

A decline in the housing transaction taxes and a preferential interest rate policy will not only reduce people's home buying costs but will also help increase market supply. With the overwhelming purpose to improve people's livelihood, what the central government most needs to do next is to take more workable actions to curb speculation in the real estate market to avoid an otherwise bulging bubble in the sector.

However, given that great changes that have happened to the market in addition to the global financial crisis, whether the latest policies targeting the real estate market will achieve their purpose remains to be seen..

The changed market environment poses a severe challenge to the government on how it can achieve a balanced development between its efforts to solve people's self-accommodation housing demands and its efforts to prevent a financial risk in the country's real estate industry.

It is indeed important to reactivate people's housing demand as a means to bolster national economic growth.

But the change to the country's monetary and interest rate policy alone are by no means a panacea. The government should take into full consideration commercial banks' profits-pursuing nature as well as the risks the latest policy might pose them.

In the efforts to expand consumer demands in pursuit of a sustained, flourishing property sector, ignoring the profits of these banks and their potential credit risks would certainly add to their financial risks and even to the whole economy.

The US financial crisis, which originated from the bursting of its property bubble, should give us lessons to learn.

There is no doubt the enormous consumption potential in the country's real estate market is yet to be fully tapped. However, the current prices, which are still beyond the capacity of the majority of would-be buyers, have seriously depressed prospects for realizing the potential.

In its efforts to boost the sluggish real estate industry, what the government should first do is to improve ordinary residents' capability to enter the market.

Other than a preferential interest rate policy and the lowering of the housing transaction taxes, we have not seen a substantive step made by the government in this direction

With a large portion of ordinary people still kept away from the real estate market, it could be too optimistic to expect the government's aspirations to expand domestic demand come to fruition.

There is speculation in the market that in order to coordinate the global efforts to tackle the economic crisis and further stimulate domestic consumption, the central bank will further cut the benchmark lending and depositing interest rates by 54 percentage points.

However, a decline in the interest rates alone is not expected to produce a big effect on the country's dampened real estate market.

The current property market is still on a downturn and the wait-and-watch attitude has been increasing among potential house buyers. Such a situation will last over a long period.

People choose to enter the market based on their judgment on whether the housing prices are at a reasonable level. And only a preferential interest rate policy will not prod them to take a drastic action.

Under these circumstances, lowering the currently hovering house prices seems to be the only way out for the country's struggling developers and the entire sector.

The author is a researcher with the Institute of Finances and Banking under the Chinese Academy of Social Sciences.