No need for house alarm

Development history and distinctive national conditions mean China's real estate market can avoid a "hard landing"

The recent decline in housing prices in some of China's cities as the result of regulatory measures has sparked some concern about the possibility of a price collapse. Some international observers have even used the ongoing price adjustments as justification for pessimistic views on China and its economy.

However, any such notions are unwarranted given that the country's real estate development history and distinctive national conditions mean it will be able to avoid a "hard landing" of its real estate market.

Compared with developed countries whose real estate markets have experienced a boom and bust, China's housing market is in a fledgling stage and there is still strong demand. The proportion of secondhand housing transactions, a key index for gauging the maturity of a country's real estate market, was only 60 percent in Beijing, Shanghai and other first-tier cities in recent years, a proportion that is much lower than in a fully mature housing market.

China's current urbanization ratio is only 50 percent and about 15 million rural laborers are expected to flow into urban areas every year if its urbanization ratio increases to 70 percent within the next two decades as expected, which, together with an expected steady growth in people's incomes, will bolster the demand for houses in the next few years.

With government-funded lower-price homes only accounting for 10 percent of the entire market, there is still a huge demand for homes from the medium- and low-income population. The country's plan to build 36 million affordable homes for targeted residents during the 12th Five-Year Plan (2011-2015) period will raise the proportion to 20 percent, and will play a constructive role in stabilizing the housing market.

The low leverage ratio in China's real estate market also ensures the country has the capability to survive the ongoing price adjustments. Compared with developed countries, China's commercial banks ask a higher down payment for mortgages. And the lending ratio for the country's secondhand housing market is only 60 percent, much lower than developed markets. In 2010, China's ratio of housing loans to its GDP was only 28 percent. In the United States, the ratio of household debts to its GDP skyrocketed to 170 percent ahead of the financial crisis.

Besides, the risks caused by China's real estate adjustments are likely to be passed to other upstream and downstream industries via industrial chains, instead of sparking a financial collapse. At the same time, any measures aimed at maintaining its macroeconomic stability and ensuring local fiscal revenues will help the country reduce the risks caused by the ongoing housing market adjustments.

The recent decline in housing prices in some cities is mainly a result of regulatory measures adopted by the Chinese government since 2010, rather than a worrying reversal in its supply-demand relations, and the government still has a range of policies and measures at its disposal if necessary.

Whether a country's real estate adjustments will trigger financial risks and macroeconomic fluctuations is decided by a range of factors, such as whether its economic development and housing market enjoy an internal growth force, the leverage ratio in its housing market, as well as its capability to ward off the impacts caused by such adjustments.

China's economic growth forces brought about by its ongoing urbanization, industrialization, marketization and globalization will further unfold and they are expected to play an important part in the country's economic growth. The ongoing systematic improvements and the untapped market potential will continue to bring the country's economy onto a fast track in the years ahead.

Compared with previous years, China's commercial banks' ability to resist risks has also improved by a large margin. Thus, some moderate fluctuations in house prices are not expected to excessively affect the sound operation of the country's financial system. Besides, the country's $3-trillion-worth of foreign reserves, the $16-trillion reserves of domestic commercial banks, as well as the ever-increasing fiscal revenues and a low fiscal deficit ratio also mean the country has adequate means to deal with the effects caused by its real estate adjustments.

The authors are researchers with the Financial Research Institute under the Development Research Center of the State Council.

(China Daily 01/05/2012 page8)