City governments are misguided by restricting purchases to contain housing prices, the chief China economist at Societe Generale says.
Kicking some potential buyers out of the market in the name of cracking down on speculation would not keep a lid on housing inflation, Wei Yao, the economist, said. Instead, local governments, the de facto landlords, needed to increase the land supply so that more homes could be built to meet demand, he said.
Beijing was the first city to launch strict measures restricting home purchases, a move it instituted five years ago. A potential buyer with no permanent Beijing residence had to make five consecutive years of local social insurance payments to qualify to buy a flat in the capital.
Dozens of mainland Chinese cities soon brought in similar measures.
However, they proved of little use, or even backfired, in taming property prices because the supply of new homes in big cities was restricted and because central bank money-printing remained aggressive.
In Hangzhou, Zhejiang province, where new purchase rules were tightened earlier in September, hundreds of home buyers broke down the door of a development project’s sales centre on its opening day, according to videos on news portals.
Similar situations are being seen in cities such as Suzhou, Xiamen and Nanjing.
Nanjing, in Jiangsu province, recently imposed its new purchase restrictions, which means a non-permanent resident will not be allowed to buy new or second-hand homes if he or she already has property in the city.
“Simply containing demand is not going to work,” Yao said at a briefing yesterday.
“If they can start to increase land supply, it can actually bring some positive surprises for growth in the near term, because it will allow investment to finally come through. The problem right now is developers cannot build where they want to build.”
At the same time, local governments in these cities were seeing a windfall of revenues from land deals, and had little incentive to lower the prices by further boosting land supply, according to Yao.
“For the central government, they have to be very careful with his housing issue,” he said.
“One dangerous thing is if you allow housing to be the only good investment you can make in China.
“What about the real economy?” Yao asked.
“Households are leveraging very fast. Right now, it’s not at a dangerous level, but the pace is absolutely too fast. If they allow households to take on leverage because valuations are very stretched in the housing sector, two years down the road we could become very concerned about China’s financial stability.”