Putting house prices in order

Since price increase has greatly influenced homebuyers' expectations over the years, it is difficult to stop speculators from entering the housing market by just passing some administrative measures. For example, when the Beijing local government imposed a conditional ban on certain groups of people from buying houses in the city in 2011, an underground ring sprang up immediately to help unqualified homebuyers bypass the ban if they paid a "fee". Similarly, at a time when most potential homebuyers expect housing prices to fall, how can local authorities entice them into buying houses at current prices?

More importantly, the ongoing changes in the housing market are not the short-term results of the macro-regulations the country adopted a few years ago. They are more like cyclical adjustments - a result of the changing financial conditions in China and abroad - which will be difficult to reverse irrespective of the "bailout" policies adopted by local governments.

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The housing market's prosperity, to a large extent, depends on a country's financial condition and housing-related taxes. A low mortgage rate, a high leverage ratio and easy access to bank loans will create a prosperous housing sector - as is the case in China. But if such policies are reversed, they will bring about some mandatory changes, no matter whether bailout measures are adopted or not.

Moreover, the explosive growth of Internet finance since 2003 and "shadow banking" have to some extent changed the direction of the flow of funds in the domestic financial market. The outflow of a large amount of deposits from China's normal financial system has not only reduced available funds that banks use for lending, but also has pushed up lending prices. That domestic banks are charging higher interest rates while the scale of lending is decreasing is a contradiction of sorts, and it will affect housing credit demands.

The depreciation of the yuan against the US dollar over the past few months, too, has dampened the prospects of yuan-denominated assets such as real estate, and deterred investors and speculators from buying new property or prompted them to sell property they had bought earlier.

It is likely that the fear of a collapse in the supply of their funds will force some developers to lower housing prices in order to get faster returns on their investment, which will play an important role in influencing housing prices.

After a decade of rising prices, China's housing market is bound to lose its upward momentum. Bailout policies by local governments to prevent housing prices from falling, therefore, are unlikely to yield expected results. Instead, they could aggravate investors' concerns over risks and thus accelerate their flight from the housing market.

The author is a researcher at the Institute of Finance and Banking, affiliated to the Chinese Academy of Social Sciences.