Ask home developers to cut prices, save market

Where will China's property market head after one-year cooling and the ensuing policy loosening for half a year? Will the market stop falling and start to pick up as expected?

From the statistics gathered in the first two months this year, the property market is unlikely to stop falling, let alone rebounding. It's hard to change an "inflection point" (a trend from upward to downward in this case) as long as it has formed. The adjustment in the real estate sector is an important part of China's overall economic restructuring.

The adjustment in China's economy since 2008 was divided into two phases. In the first one, export growth slowed down and stayed within "a normal growth range" amid the change of the external environment. Its growth, once much faster than that of GDP, dropped to a pace on a par with or even slightly below the economic expansion rate, bringing down the country's GDP growth to around 8 percent from over 10 percent.

The second phase is a shift to a growth model driven by domestic consumption instead of investment - a "new normal" that centers on real estate adjustments. This will lead to further economic slowdown to 6-7 percent. During this period, investment growth, like that of exports, will drop steadily to slightly lower than the GDP growth.

Property adjustment is just getting started, and we estimate the process will last for at least five to six years. After a fast expansion for 15 years, a low run for five to six years was fully justified by the long-term adjustment rule, and no policies can alter this trend.

Statistics show that the downward trend of the real estate market continued. Although the cooling speed slowed in recent months, the downward trend of the market has yet to change. In the first two months, investment in the sector posted an increase of 10.4 percent from a year earlier, down 0.1 percentage point from that of 2014.

A regional discrepancy is quite clear: the eastern area witnessed a rebound while central and western parts saw further slowdown. Housing investment jumped 11.4 percent year-on-year in the coastal area, or 1 percentage point higher than in 2014, but only 6.7 percent in the central and 11.1 percent in the western - a drop of 1.8 and 1.7 percentage points respectively from the average rate of 2014.

Investment growth, especially in the coastal area, seems to have sent us a signal that the housing market is turning stable. But the view will be totally different when we see it from the data of home sales - by floor areas and by volume.

Instead of a rebound, the property market even deteriorated. In January and February, commodity property sales by floor areas slumped by 16.3 percent year-on-year, down 16.2 percentage points than the same period last year and 8.7 percentage points than in 2014. The slump of residential housing sales was even bigger – by 17.8 percent. It's the same scenario in East China - with an accelerated decline of home sales.

Data related to the growth in supply and demand show an asymmetric feature in the process of property adjustments: The drop of investment growth slows whereas the slump of sales accelerates. What does it mean for the housing market?

Behind such an asymmetry, as I see it, hides a huge risk. Real estate demand continues to fall, but the developers refuse to act correspondingly. It's against the market rules. But why do they keep supplying amid such a weak demand? That's a question we need to ponder on.

I think there are two reasons behind. For one, the real estate developers have won strong support from local governments. Since the end of last year, China's central bank has eased the monetary policy by lowering the reserve requirement ratio and interest rate. To them, it is a strong signal of bailout from the central government, so they have the confidence to make a decision of increasing their investment that is against market forces.

The second reason is that these developers have long been spoiled by a surging housing market. They believe, no matter how wrong it is, that housing prices will keep rising and the momentum will never come to an end because the country's urbanization is far from finished. As such, they think the property market will keep its bull run amid the accelerating urbanization.

That's a lie they make up, but they believe it and keep living in it. Nothing can make them cut property prices because they fear a dropping price will lead more people to take a wait-and-see attitude. That would be a vicious circle. More importantly, they got the back of local governments some of which even choose to punish those who cut housing prices.

They never came to understand what it means after the real estate investment and prices have been surging for more than a decade. When there is a huge stock already, there will be huge glut in an industry that has kept expanding at a rate of over 20 percent for more than 10 years. This is true for many industries, like household appliances and steel industries.

The asymmetric adjustment between demand and supply means more houses will be built but fewer can be sold. That will lead to an increasingly huger stock than the market can handle. The longer such a situation persists, the greater the risks will be in the real estate and financing markets. Local governments must put a brake on the "bailout" policy by encouraging developers to reduce the housing prices to boost demand, while curbing investment as an synchronized adjustment to cut supply. This will speed up the process for the market to clear the stocks.

When trying to salvage the housing market, we cannot rely on an anti-market force to buck the trend. When the demand becomes weaker amid adjustments, we have to act on the price and supply. Once the housing price drops, the demand will rise. Stabilizing the price and investment will only lead to an increasingly shrinking demand, hindering economic cycling and stagnating the real estate market amid the lack of capital liquidity.

There's nothing to fear when housing prices and investment drop amid adjustments. It is just a process that squeezes out bubbles and prevents financial risks. Good news will come along. For instance, it will help boost China's urbanization, narrow residents' income gap and propel the development of real economy. It's especially helpful for more funds and resources to flow into industrial upgrading and innovations.

It is the long existence of real estate bubbles that can block industrial upgrading, expand the income gap and impede the urbanization.

The author is a researcher and vice director of Department of Policy-making Consultation of the Chinese Academy of Governance.