By Michael Lelyveld
China’s state media have reported progress in the government’s struggle against higher home prices, but official surveys suggest that housing costs in most cities have continued to climb.
Over the past year, Beijing has put greater pressure on local governments to crack down on speculation and price growth in housing after restrictions were temporarily eased in 2015 due to fears of an economic slump.
With the approach of the Communist Party’s politically crucial 19th National Congress in the fall, the government appears eager to claim that its policy of restraining prices through local rules has been a success.
Last month, the official Xinhua news agency reported that home prices “have shown signs of cooling,” noting that half of the 70 medium-sized and large cities in a National Bureau of Statistics (NBS) survey showed a month-on-month price drop or a slower price rise in May.
The positive reading of the survey results appears to reflect the importance of showing that the government has gotten the housing problem under control.
Official figures on prices in June are scheduled to be released Tuesday. The NBS said Monday that investment in property development rose 8.5 percent in the first half, slowing slightly from the 8.8-percent rate reported for the five-month period.
Xinhua cited the result as a sign of cooling in the market, but the value of first-half housing sales jumped 21.5 percent from a year earlier, up from 18.6 percent through May.
Price hikes for property have heartened investors but dismayed poorer buyers, who find new housing unaffordable.
“Houses are built to be lived in, not for speculation,” President Xi Jinping said in a frequently repeated statement of government policy last year.
While month-to-month increases have slowed in some cities, an examination of the May data found that average prices fell from a month earlier in only nine cities on the NBS list.
In year-to-year comparisons, only one city recorded a price decline.
In 30 of the 70 cities, average prices rose from a year before at double-digit rates.
Year-to-year increases in the megacities of Beijing, Shanghai and Guangzhou ranged from 11 to 19.4 percent. Other cities including Hefei, Zhengzhou and Wuxi reported price growth of 20.9 to 26.4 percent.
Eager to buy
With limited options for high returns, investors remain eager to buy real estate even as housing inflation has slowed.
Investment in residential buildings rose 10 percent through May from a year earlier to 1.86 trillion yuan (U.S. $274.7 billion), the NBS said in a separate report, although many apartments remain unoccupied and unsold.
The People’s Bank of China (PBOC) has taken steps to cool property speculation by issuing warnings against mortgage risks and phony divorces aimed at avoiding higher down payment requirements for second-time buyers.
At least eight banks have raised mortgage interest rates, while five have stopped accepting commercial real estate as collateral for loans, the official English-language China Daily reported.
In May, the Standing Committee of the National People’s Congress agreed to consider a national property tax this year, putting it back on the table after it was abruptly pulled from the agenda before annual legislative sessions in March due to fears of destabilizing the market.
The tax is seen as a major disincentive to buying multiple apartments for investment purposes and leaving them empty and unused.
But so far, the central government has relied largely on measures by individual cities to curb speculation with rules for higher down payment requirements or restrictions on buying second or third homes.
The local limits have created a patchwork of differing regulations, driving investors to some second or third-tier cities to evade tougher rules.
A study released last month by economists at Harvard University and the National Bureau of Economic Research highlights the unevenness of China’s housing boom.
Citing a decade of data since 2003, the study called the surge in China’s home prices “one of the most extreme economic events of the new millennium.”
Prices nearly quadrupled in first-tier cities and tripled in Tier 2 cities, the economists said in the study entitled “What is Special about China’s Housing Boom?” published by voxchina.org.
Unlike the ill-fated U.S. housing boom that sparked the financial crisis of 2008, China’s construction craze was accompanied by major economic expansion and sweeping urbanization.
“Yet, even if a massive scale building boom is warranted, China may be building homes in the wrong places, at the wrong quality levels, and at the wrong time,” the economists wrote.
China has tended to build proportionately more in areas that are “less productive.” While affordable housing is needed in poorer areas, the newly-built properties have been priced too high for former rural dwellers coming into the cities.
The reason is that local projects have been pushed to satisfy demands for increased gross domestic product rather than the market.
“In China, greater construction levels in lower income areas are more likely to reflect aggressive local governments that use construction to bolster GDP growth,” the study said.
Edward Glaeser, a Harvard economics professor and an author of the study, said local rules limiting multiple property purchases for speculation may help in some cases, but they don’t address the underlying and longer-term problems.
‘Difficult, cumbersome approach’
In a phone interview, Glaeser called reliance on the restrictions “a difficult and cumbersome approach” that may eventually have some dampening effect on demand.
“But relative to the power of supply to move the market in the long run and the power of current expectations, it’s hard to imagine that these instruments will be all that effective,” he said.
In some cases, the local restrictions also have the potential to “backfire,” as buyers rush to complete purchases before regulations become “too onerous,” Glaeser said.
The study suggests that the forces of supply and demand will be reconciled over the long term, looking ahead perhaps 20 years.
A bust in the housing market is “not inevitable,” it said, and high prices may be sustainable, if the government “significantly reduces the flow of new construction.”
But the study warns that if the current pace continues, a major price correction is “distinctly plausible.”
“If today’s vast construction levels persist, it seems likely that supply will outstrip demand and that prices will fall,” it said.
China’s state media have focused on signs suggesting that current policies are gradually working to cool off the market without creating a risk of disruption.
The average price of new homes in the southern city of Shenzhen fell slightly in June for the ninth month in a row, dropping 11.8 percent from a year earlier, Xinhua reported on July 2, citing municipal authorities.
Before local restrictions on purchases last October, Shenzhen was the hottest housing market in China. According to apparently conflicting NBS data, average prices rose 5.4 percent in May from a year before and remained 46.5 above 2015 levels.
The average home in Shenzhen costs 44 times the average annual household income, The Wall Street Journal reported last week, citing Zhang Ming, a senior economist at the Chinese Academy of Social Sciences.
Reports of lower prices in Shenzhen triggered a rush of bargain hunting in June, as sales measured in floor area soared nearly 25 percent from the month before despite the restrictions, Xinhua said.
China is planning a “long-term mechanism” to address the problems of the property market, Xinhua reported separately.
The mechanism will entail a “basket of reforms in areas including taxation, finance and land supply systems,” the news agency said.