China's residential housing prices rose 10.4 percent year-on-year to 2,480 yuan (US$299) per square meter in January to July of this year.

This price means that, with the current per capita urban income -- 8,472 yuan (US$1,203.2) in 2003 -- an 80-square-meter apartment will cost 11.7 times the total annual income of a family of two wage-earners.

Rising public disquiet about real estate developers' alleged profiteering is accompanying this sharp rise in housing prices.

It is a fact that real estate developers' profit rate -- about 18 percent according to a recent report by the Ministry of Land and Resources -- is higher than China's average industrial profit rate of about 5-10 percent.

But careful analysis shows that China's high housing prices are the result of a host of factors, rather than simply motivated by real estate developers' greed. Therefore, any solution can only be based on a comprehensive overhaul of the country's economic and public administration system.

First, we have to admit that China has scant land resources available to accomodate its 1.3 billion population. On the other hand, the nation's rapid pace of urbanization, which is expected to transform 500 million of China's 800 million farmers into urban residents by 2020, will result in continued demand for housing.

These two basic factors determine that China's housing price will remain relatively high in the long term, even after the nation becomes more developed.

But there are other structural problems pushing property price even higher in China.

Unlike manufacturing, the real estate sector is not a field that anyone who has some money and good will can enter. It involves a complex procedures related to land requisitions, government relations, urban development policy and good bank contacts. Only those who have enough capital and/or who can adroitly deal with government, banks and the market can develop real estate successfully.

These factors are further complicated by the huge investment needed for real estate development and long investment period. As a result, there can hardly be a surplus of real estate in China. According to the recent statistics from the National Bureau of Statistics, properties vacant for more than three years only accounted for 8.8 percent of the total real estate available this year through July.

Correspondingly, the price will not be lowered due to increased competition.

Limited land supply -- as we have mentioned -- and the strict arable land protection policy also lead to high housing price. This factor is worsened by China's urban development and public investment system.

Many people who admire relatively low housing prices in the United States, Canada and some European nations often neglect the fact that their housing is mostly built in suburban areas where land prices are much cheaper. But in China, most urban housing, especially in big cities like Beijing and Shanghai, is built in downtown areas.

Why? Because traffic and public service facilities in China's suburbs cannot support the massive development of housing there. In the past 50 years, government mainly invested in manufacturing or other areas of production, instead of in public services. As a result, even affluent cities like Beijing and Guangzhou do not have many subway or urban light rail lines.

Although urban traffic investment has greatly increased, it may take years for China's traffic and public service facilities to support the massive suburbanization of residential zones.

In terms of demand, property differs from other commodities because it is also an investment tool. Given China's slumping stock market, low interest rates and lack of other investment channels, many middle-class people choose to invest in real estate, which pushes housing prices even higher.

While the above long-term and structural factors result in relatively high housing prices in China, some short-term factors, particularly the tightening lending policy adopted by the central bank in June last year and this year's macroeconomics adjustment, help reduce investment in property development and increase people's concerns that they cannot afford housing.

This worry stimulates people to purchase and in the short terms, China's housing prices enjoy double-digit growth.

Based on the above analysis, a series of policies have to be adopted to maintain stability in housing prices. We do not say lower the housing price because 80 percent of China's urban residents have their own properties and lowering housing prices would mean big losses for them.

First, land transactions and real estate development must become more transparent and open, to enable more investors into real estate development. Meanwhile, more financing channels should be developed to increase the availability of capital for developers.

Second, China's land protection policy has to be gradually relaxed to increase the amount of land available for real estate development. It should be made clear that property development can produce much greater returns than agriculture. But of course, farmers should share in these returns, otherwise, these farmers will pose a threat to social stability. Increased government investment in infrastructure, particularly in transport, should accompany this increased supply of land.

Third, more economic housing should be developed for low-income earners, but policies must be tightened to avoid property investors pouring their money into this policy-backed economic housing to seek higher returns.

Finally, when the government draws up strict policies for the real estate sector, it should develop policies to cushion the policy impact. For example, tightened lending policies should be accompanied by greater supplies of policy-backed economic housing.

Of course this is very difficult because, it needs improved coordination between different government departments, but if we want a reasonable housing price while not hurting the sector at the same time, these measures will always be worthwhile.

(Business Weekly September 10, 2004)