Realty market faces dilemma
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Should the government take more strict measures? The tricky issue is that the housing market is tightly embedded in the local growth-oriented regime. Now it is more an art than rocket science to gauge a proper level of control. The target set by the government to regulate the housing market in such a way that prices rise slowly and modestly would now be hard to achieve, because it strives to provide some certainty of value appreciation in a very uncertain environment - an environment in which we do not know how to avoid value depreciation during inflation. This may in turn unexpectedly blow up the property bubble.
It would be a clich to suggest that housing prices could not be predicted. This is particularly true in the current situation, because the price changes are affected by many policy uncertainties. It is more complicated than gauging demand and supply. For example, migrant workers' demand for housing depends upon the hukou (house registration) reform and the progress of migrants' integration into cities.
More than that, housing consumption is closely related to (perceived) inflation. Nowadays, more affluent households adopt a coping strategy of using property to invest for the future. For them, buying a house is not different from buying a piece of antique.
Nevertheless, the current rental yields are too low to justify housing as an outlet for capital investment. The purchase of housing depends entirely on value appreciation or capital gain. The prospect of rising inflation would strengthen the view that housing investment is a long-term safe haven for capital gain.
The policy regulation, therefore, is to clear any bottleneck in the supply line that may artificially boost such investment for capital gain even in the short term. A policy that reduces the fluidity of the housing market would be useful, too.
The policies could include building more affordable houses, reforming the land-centered local fiscal regime and creating a multi-layered housing system, which would be sufficient to maintain overall stability of the housing market, while permitting usual price fluctuations and making the risk of using housing as asset investment more transparent.
An overheated housing market would increase the financial risk, thus creating fluctuations in the overall economy. While it is common perception that an affordability issue may even engender social stability - it is more a discourse of middle-class high-priced entrance into the commodity market rather than a fact that may imply a solution to the housing price adjustment problem. But expecting price adjustments may be only an illusion.
The best scenario for the housing market next year would be neither boom nor burst. There should be no guarantee for investors' asset valorization, either. At the end of day, it is such a myth in the era of inflation that could be self-fulfilling.
The author is a professor and director of Urban China Research Centre at Cardiff University, United Kingdom.
