Is Beijing Blessing a Housing Bubble to Rekindle Economic Growth?

China has made reduction of unsold housing inventories in the nation’s lower tier cities one of its central goals for 2016, as the country’s leadership looks for ways to spur growth in an economy which last year slipped to its slowest expansion in GDP in the last 25 years.

However, the looser monetary policies and lower taxes on real estate transactions that are among the tools being used to attack this glut, appear to be creating boom markets for housing in the country’s already successful first tier communities where demand for real estate and home prices were already growing rapidly.

While government leaders have made statements in recent weeks about the need to control prices in the China’s mega-cities, there are signs appearing that the authorities are willing to tolerate skyrocketing prices in places like Shenzhen and Shanghai as collateral damage in a battle to revive a key economic sector where growth in investment slipped to just one percent last year.

Reaching for Trusted Economic Tools

As China’s leadership has searched for ways to maintain growth in the world’s second-largest economy in recent months, Xi Jinping’s economic team have reached for the familiar tool of looser monetary policy, lowering interest rates six times in 2015 and earlier this month reducing the reserve requirement ratio for the nation’s banks.

The government has also taken steps to directly stimulate the housing market by lowering downpayment requirements three times in the last year, with the most recent round of measures being unveiled during February.

Also during last month, China’s Ministry of Finance cut transaction taxes on home sales, including reducing taxes on home purchases by first time buyers to as low as one percent from the previous three percent.

Despite the changes in downpayment rules strictly excluding first-tier cities, the result of this combination of monetary, tax and administrative measures is that home prices in Shenzhen have already risen over 50 percent in the last year, and a recent survey showed that average home prices in Shanghai rose 3.6 percent from January to February of this year.

Official Statements and Policy Realities

Faced with clearly skyrocketing home prices in China’s largest cities, and mindful of the need to reassure a public that will bear the brunt of this housing inflation, local and central government officials have stated their support for controlling housing prices in the country’s first tier cities.

During the National People’s Congress being held currently in Beijing, Minister of Housing and Urban-Rural Development Chen Zhenggao told the media that his department is working closely with local governments in Beijing, Shanghai, Guangzhou and Shenzhen to control housing prices.

The government is “paying the utmost attention” to housing prices in those cities, Chen was quoted as saying in the South China Morning Post, without going into specifics.

During the same meetings, Shanghai party secretary Han Zheng told the media that, “An irrational and overheated sentiment have emerged in the Shanghai real estate market, and these sentiments have raised home prices.”

The top official of China’s commercial hub promised that the city would strengthen housing regulations to control prices, without going into details. In recent months Shanghai has required developers building new projects to include a greater quantity of smaller units in their housing developments, effectively lowering the ticket price of new homes while not having a direct impact on the cost per unit area of housing.

Squeezing Urban Dwellers to Revive Smaller Cities

While officials remain vague about reining in breakneck price growth in cities like Shenzhen and Shanghai, the government has made more specific plans for reviving demand in the nation’s lower-tier communities.

De-stocking of an oversupply of housing which grew by 24 percent to more than 32 million square metres last year, according to official figures, was one of the primary goals laid out in the party’s Central Economic Working Conference in early December. Later that same month a Politburo statement declared that, “We must destock property inventories, by turning migrant workers into urban citizens in a faster pace and pressing ahead housing reform to meet demand from these new urban residents.”

This focus on reviving the housing market comes soon after the collapse of China’s stock market, where the government had appeared to encourage margin-lending and other risky practices in bid to turn the equity markets into a new source of economic growth.

At the local level, officials have now been incentivised to sell down housing stocks with the Ministry of Land and Resources announcing this year that it would tie approval of new land sales to local governments’ success in reducing their inventories of unsold homes.

While officials have made pronouncements of the need to control housing costs in the first tier cities, the government’s need to find a reliable source of economic growth opens the possibility that senior officials are now willing to tolerate housing inflation if a revival of the real estate sector helps the country meet its top level economic targets.