Realty sector won't be used to boost growth
The recent meeting of the Political Bureau of the Communist Party of China Central Committee, which focused on China's economic work in the latter half of the year, reiterated that houses are for living in, not for speculation, and emphasized continued efforts are required to build a long-term mechanism for the real estate sector.
The meeting advanced for the first time that investment in the real estate market should not be used as a short-term stimulus to boost the economy. Which shows the central government has a clear understanding of the current situation of the real estate sector, and is committed to transforming the economy from one driven by fast-paced growth to innovation－driven high-quality sustainable development.
The overheating of the real estate sector resulted in an unbalanced economic structure, which is a big obstacle to China's economic transition to high-quality development. In recent years, China's economy has increasingly relied on the real estate sector, and more and more banks have given loans to realty companies and property developers. By the end of last year, the loan balance of the real estate sector was 38.7 trillion yuan ($5.51 trillion), up 20 percent year-on-year.
The overheated real estate sector has had increasing negative impacts on China's economic structure. Given the uncertainties associated with the manufacturing sector and the high rate of return in the real estate sector, many manufacturers rushed to reap the benefits of the property market, which weakened investments in the manufacturing and innovation fields.
According to our research, the relationship between housing prices and the industrial structure is like an inverted "U". At present, housing prices in a majority of Chinese cities have passed the inflection point, and high housing prices are restraining the further upgrading of the industrial structure and improvement of total factor productivity.
But, unlike the past, the real estate sector cannot be an effective means to stimulate economic growth. An increase in real estate investment may drive up economic growth in the short term, but if housing prices continue to rise, they will increasingly squeeze people's consumption and fixed asset investment in other fields.
According to our calculation, when the ratio of housing price and income exceeds 9, the real estate sector's function to drive economic growth can hardly offset the negative impact it causes on the economy. Based on the average price of commercial housing in 2018, the ratio of housing price to income is about 9.3, which indicates that a further rise in housing prices will weaken the economy, rather than stimulating growth in the short term.
Also, if the real estate sector is further used to stimulate economic growth, it could create bubbles in the sector, which would create financial risks endangering economic stability.
From June 2006 to December 2018, the individual housing loan balance increased 11-fold from 2.1 trillion yuan to 25.8 trillion yuan. The debt-to-assets ratio in the real estate sector is as high as 70 percent, with the non-performing asset ratio rising since 2016. And by the end of last year, the commercial housing loan balance had increased 15-fold from the end of 2004 to $38.7 trillion yuan.
By reiterating that houses are for living in, not for speculation, and stressing that the real estate sector will not be used to shore growth in the short term, the meeting of the Political Bureau of the CPC Central Committee has made it clear that innovation-driven development is the new economic norm, and governments at all levels have to abide by it.
With the pressure of economic downturn increasing in recent times, different parties have different expectations for the real estate control policy. Due to economic pressure, some local governments have eased the real estate control policy, which prompted many to speculate that the real estate control policy could be loosened. Therefore, the recent meeting's announcement will help stabilize different parties' expectations for the real estate market. More importantly, it will prompt local governments to allocate more resources to the real economy and further boost its development.
As the real estate control policy has been elevated to a central government-level policy and a real estate control mechanism is on way to be established, it is very important that local governments strictly implement the real estate control policy in local areas.
Ni Pengfei is director of the Center for City and Competitiveness, Chinese Academy of Social Sciences, and Shen Li is a researcher at the Department of Economic Forecasting of State Information Center. The views don't necessarily reflect those of China Daily.