Halting house-purchase subsidies helps correct distortion of market

A sales woman introduces a property program to visitors at a spring real estate exhibition held in Beijing, April 17, 2015. [Photo/IC]

ON TUESDAY, the government of Shenyang, the capital of northeastern China's Liaoning province, issued a guideline lowering the down payment requirements for house purchases in the city to as low as zero, and subsidizing purchases by college students and fresh graduates to encourage sales. The higher authorities suspended the guidelines on Tuesday night. An article in Beijing Youth Daily commented on Wednesday:

For almost a decade the real estate market has been propelling China's economic growth. Now the market is cooling and it is casting huge pressure on the economy as a whole, due to the chain effects.

That is why one local government after another has issued policies aimed at reducing local housing inventories.

However, the recent short-lived move of Shenyang is rather controversial because it was aimed at college students and fresh graduates, who generally do not have the economic capacity to purchase apartments in big cities. If the local government blindly "encourages" them to buy apartments to achieve its goal of destocking, it will only result in heavy burden for the students and their families.

A deeper look at the realty market will find the huge surplus comes from the excessive building of certain developers during the years of "prosperity". In that process, local governments played a role by loosening regulation over the realty market and helping developers get the land they needed.

They did so because they could get money through the land sales and tax from the property sales. In other words, the wrong moves of realty developers under the guidance of wrong local policies have resulted in the huge housing surplus.

Therefore the policy of Shenyang won't help the city's property destocking because it continues the old thinking of profiting from the purchasers. What is needed today is to lower the too high house prices and encourage developers to merge and restructure.

The higher authorities have done a good move by suspending the moves of Shenyang. The real estate market needs to develop healthily instead of being further distorted.