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Housing Policy Must Be Obeyed

The government must continue its property policies aimed at cooling down the fevered sector.

House prices have been rising rapidly in the past year. Seven central ministries jointly released a circular in May, aiming to stabilize prices.

The targets detailed in the circular demonstrate explicitly that policy-makers are making efforts to iron out distortions in the real estate market. Priority is given to preventing excessive investment in the sector and weakening the growth momentum of house prices.

The new policy restricts wild speculative deals for land and houses -- the main factor behind the soaring prices. It will strengthen regulation to ensure a more rational supply structure -- for example, building more government houses and renting them to the poor -- to benefit low and medium-income earners.

The move will raise market entry standards for intermediate agencies and require more clear information be disclosed to the property market.

The reiteration of the role of the government in solving the problems in the property market, on the one hand, shows the market is rather problematic. But on the other hand it demonstrates the government's determination to regulate the market to ensure its healthy development.

Government measures alone are not enough to curb wild speculation in the market. The healthy growth of the market ultimately rests on enhanced role of the market.

House sales are currently market-driven. But the factors involved in the construction process, such as capital, are often distributed in a non-market way. The ease of access to bank loans has benefited developers, but shifted risk to the lenders.

One solution is to raise interest rates to increase the costs of pooling capital for developers. Such an increase as well as the implementation of other points in the circular, such as levying a real estate tax and establishing a co-operative house-building regime, should help stabilize the development of the sector.

As local governments begin to implement the new policy, the various parties whose interests are at stake have tried every means possible to fight the changes.

Local governments know the basic thrust of the new policy is an attempt to stabilize house prices through adjusting the product structure of the sector. But since the central policy leaves some room to manoeuvre, they have pushed the policy to its limits, where possible, to ensure the local property market maintain rapid growth.

As a result, in some places, the market climate has not changed much. Some developers are even enjoying more favourable policies from local governments.

In some regions, house prices seem to have become relatively stable. But prices in Beijing continue to rise.

According to the Beijing Municipal Development and Reform Commission, house prices in the capital increased by 11.1 per cent year-on-year from January to May.

Developers often warn prospective house buyers it is not advisable for them to wait for house prices to fall. At the same time they resort to illusive sales and promotion strategies to make consumers believe their claims.

It is justified to conclude that some local governments and developers are colluding to resist the new national policy.

If the policy is not effectively implemented, excessive investment and inflated prices will lead to more bubbles in the sector. If no action is taken, bubbles are set to burst.

Since the new policy was implemented, the sector has been cooled down in some places. The scale of mortgage credit has shrunk. The number of house deals is on the decline. Some intermediate agencies have been closed out by dampened market demand.

Fearing the change in market mood will affect the growth of the local pillar industry and jeopardize the local economy, some local governments and developers have put forward the warning that macroeconomic regulation may plunge the economy into disastrous deflation, and therefore it is time for the regulation to be stopped.

Policy-makers should be aware that although the new policy is taking effect, wild property speculation is yet to be brought under full control. The policy needs to be continued to rein in a sector that has gone awry.

If the new policy is stopped, the credibility of the government will be jeopardized and the interests of the general public damaged.

Forcing down the average house price remains a paramount task for the government. Although the authorities provide budget housing for the poor, there are plenty of loopholes in the process, which have affected the efficacy of the policy. The solution is to supply more low-priced commercial housing to the market.

According to figures for the first five months of the year released by the National Bureau of Statistics, property over-investment has spread from eastern and coastal areas to western, inland provinces. If the new policy is not seriously implemented, the market will face more risk as prices continue to rise.

It is clear some local governments and developers are trying to keep the status quo. The government should be alarmed by the trend and take further countermeasures so the market can develop in a direction that will benefit the general public.

(China Daily August 31, 2005)

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