On Real Estate: PKU professors call for changing "three red lines"
Economists Yao Yang and Xu Gao on economy and housing
The National School of Development (NSD), Peking University, held a seminar on China’s economy and real estate industry on the evening of July 12, which was also live-streamed. Three experts were invited to speak and this newsletter translates the transcripts of two of them.
They are 姚洋 Yao Yang, Dean and Professor, NSD, Peking University, and 徐高 Xu Gao, Chief Economist of the Bank of China International Co. Ltd. and adjunct professor of NSD.
China's potential growth rate is about 6%, and that is still a relatively high estimate. If China wants to achieve 5.5% growth for 2022, its economy needs to grow 8% in the second half, which will be extremely difficult. Even reaching 6% in H2 is also very difficult, due to stringent COVID-19 controls and the deep decline of the housing industry.
A relaxation of COVID-19 controls is needed to facilitate domestic travel, especially with regard to Beijing and Shanghai. Yao unequivocally called the “three red lines” policy governing the financing of real estate developers a mistake that needs to be corrected.
The economy is "cold inside and hot outside" and the momentum of recovery is not strong. Domestic demand is weak, largely due to real estate where the weakness is unseen in more than a decade.
China's policies on real estate regulation and local government financing are too tight in recent years. Tightening of credit for real estate, such as the "three red lines" policy, is too strict and triggered the downward trend of the industry and pushed the industry into a vicious circle.
The reason why the policy is always tightening is mainly due to some long-standing misconceptions about the real estate industry. One of the misconceptions is that our country has built enough housing in cities. The second misconception is that speculation is the main reason for the rise in house prices. That leads to restraining speculation on the demand side, but not effectively increasing the supply, which simply can’t solve the long-term contradiction of insufficient supply. The third misconception is that real estate investment and infrastructure investment are not sustainable.
[Pekingnology: I don’t have a PhD in Economics but I think the third misconception is the mainstream view - the investments are indeed unsustainable.]
Xu’s policy suggestions include the following. Relax the financing policy over the real estate industry. The Chinese government should establish a real estate industry short-term relief fund of a trillion yuan to eliminate the credit risk of real estate developers. Apart from the short-term emergency, China should push forward the supply-side reform of the real estate industry in the longer term and build a more price-flexible land supply system. At the end of the day, correcting the misunderstanding of real estate is more fundamental.
The transcript of Yao’s speech in Chinese
Achieving the stated growth targets is extremely difficult
Today, I would like to talk about my views on the economic growth in the first half of this year and my outlook on the economic growth in the second half of this year.
The economy grew by 4.8% in the first quarter of this year. As the proportion of the first quarter in the whole year was relatively low, accounting for only 20%, the equivalent annual growth was only 0.96 percentage points. The second quarter accounted for 25% of the whole year, with actual growth of 0.4% (after supplementary data became available), so the contribution to the whole year was 0.1%. The first half of the year adds up to a little over 1 percentage point.
The annual growth target set at the beginning of the year is 5.5%. According to the current actual situation, economic growth in the second half of the year will have to contribute 4.4 percentage points. That is, the second half of the year has to see a 8% growth, to ensure the annual growth rate of 5.5%.
Is it easy to grow at around 8%? I think the difficulty is quite great. A very important reason is that it has greatly exceeded the potential growth rate of our country. China's potential growth rate is about 6%, and that is still a relatively high estimate. As a result, 8% far outpaced our growth rate. Unless the economy rebounds sharply in the second half of the year, as it did in the second half of 2020, it will be extremely difficult to meet expectations.
If the second half of the year only reaches the potential growth rate of 6%, the second half of the year can only contribute 3.3 percentage points to the growth rate of less than 4.5%(to be exact 4.36%) for the whole year.
However, I think the 5.5% growth target is not a very important indicator, and it would be good if the potential growth rate can be smoothly restored to 6% in the second half of the year. My worry is that reaching 6% is also very difficult. This judgment is based on the factors that have led to the decline in economic growth since the second half of last year.
Why is the economic growth rate declining so fast, especially in the first half of this year? Personally, I think it is mainly due to two reasons, one is COVID-19 prevention and control, the other is the sharp decline in real estate.
The establishment of a unified, national, long-term COVID-19 prevention mechanism
This year's COVID-19 situation is different from that of 2020. The spread of SARS-CoV-2 in 2020 was not so strong, so the “zero COVID” method we adopted at that time was very effective, and China did the best in the world. Therefore, China's economy started to recover in May 2020. Until the first half of last year, the economic recovery was very good. However, this year's Omicron variant is different. It is highly contagious and it is extremely difficult to prevent it completely. On the other hand, as it has become extremely difficult to clear out SARS-CoV-2 quickly, our COVID-19 prevention measures are more stringent than in 2020. As a result, consumption is greatly restricted.
An important success factor for our epidemic prevention in 2020 is the delegation of powers, with each region operating on its own. Today, the decentralization of COVID-19 prevention has caused great problems. Although the Central Committee of the Communist Party of China and the State Council have repeatedly banned excessive measures, due to the different standards in different regions, the movement of people between regions is greatly restricted, which greatly affects economic activities, especially in Beijing and Shanghai, the two engines of China's economy. The difficulty in the movement of people in these two cities has a greater impact on the whole country.
In the second half of the year, if China's economy is to recover, we must find a long-term COVID-19 control mechanism. If this cannot be achieved, the economy will not be able to recover steadily. It is impossible to eradicate SARS-CoV-2, which is science. It is also science that humans will eventually coexist with SARS-CoV-2. However, coexistence is not equal to “lying down,” which does not mean that we should just ignore everything like other countries.
I have a few suggestions:
First, we should change the current 社会面清零 Zero-COVID at the Community Level to 社会活动面清零 "Zero-COVID in social activities." The addition of the word 活动 "activities" means that people who participate in economic activities shouldn’t be infected. Public places can be subject to a 3-day or 7-day PCR-negative requirement. Now the sites for PCR testing have been densely distributed and accepted by the public. If an infection is detected, he or she should stay at home or be transferred to a centralized quarantine facility, so as to keep the social activities free of infection.
Second, change the current method of monitoring travelors based on which residential compound they come from or even by their city, to monitoring based on smaller units. It is better to go further and monitor travelers by only specific residential buildings. At present, people from Beijing and Shanghai are directly put into quarantine in many other places as long as they are seen. The impact is too great. How can the economy survive without the movement of people?
Third, no large-scale remote quarantine. It is costly and not beneficial to take thousands of people away for quarantine. They can be quarantined in centralized quarantine facilities locally. Those who haven’t been infected but are suspected can observe themselves at home.
Fourthly, we should unify all kinds of codes across the country, unify COVID-19 prevention policies across the country, and lift all restrictions on domestic travel and refer to only the PCR testing result. It is impossible to return to Beijing after passing through Shanghai as it is now. You have to go around to other places and stay for many days. Although China has removed the mark for COVID-hit regions on visitors' travel code, the problem has not been fundamentally solved.
Finally, to open up international travel, China cannot be isolated from the world. In fact, China has not been decoupling from the world in the past two years. I firmly oppose the idea that the world is decoupling from China. Data show that China is linking up with the world, not decoupling.
No one can predict exactly when COVID-19 will end, nor can they predict the virus’ evolutionary path. Therefore, we must have a basic standard and a smooth transition in our COVID-19 prevention measures. For those who come from abroad, of course we still need to do prevention and testing, but the existing measures can be relaxed appropriately to facilitate people's exchanges.
Adjusting the Policy on Real Estate
The second reason for the decline in growth in the first half of the year was the cliff-like decline in real estate. We underestimated its impact. How big is the contribution of real estate to the Chinese economy? According to some calculations, it is 17%. About 17 trillion of our more than 100 trillion GDP is directly or indirectly contributed by real estate. Real estate has broad implications for the economy. It is not just building but also decorating after the house is built. That requires decoration materials and then buying furniture, appliances, and so on. Real estate can drive the whole consumption.
In the first half of this year, the real estate sales of the top 100 real estate enterprises dropped by 51%, which has never happened in history. Of course, a 51% drop in sales does not mean a 51% drop in real estate value-added, which cannot be fully matched. However, due to the fact that real estate accounts for too much of GDP, it is very difficult for other industries to make up for this "hole" dug by real estate only through extraordinary growth. Real estate data improved in June, but whether that will continue remains to be seen.
Why is there such a huge decline in real estate? Some people say that due to the changes in China's population structure, the real estate industry has entered a period of adjustment, which may be a long-term factor. However, long-term factors are difficult to cause a sharp drop in the short term. Some people attribute the short-term sharp drop to the fact that the debt in the real estate industry is too high, but even if the debt is too high, there won’t be an "avalanche" if there is no external force to drive it.
Personally, I think the main reason for the real estate downturn is the "three red lines" policy.
The central government has made repeated orders to ensure the healthy development of the real estate, requiring all localities to implement policies based on their own cities. Last year, the Central Economic Work Conference had already put forward the proposal. This year, the “Two Sessions” have again stressed that. Local governments have also begun to act, second only to the 2016 round. However, the real estate industry rose quickly after the local government took action in 2016, but not this year. Some people attribute it to the lack of money in the hands of the people, which is not entirely true. In 2020, the situation of COVID-19 was so severe that real estate rose by more than 20%, so it had little to do with COVID-19 and people's income, but had more to do with banks and people's confidence.
In the first half of this year, credit for real estate fell by 53%, a cliff-like decline. Because financing clogged for the real estate after the policy and apartments couldn’t be finished. People are rational. When they saw that the real estate business was illiquid and there was a risk in buying a house, they would not buy it. What's more, buying a house was always a huge investment.
The same is true for banks. When they see that the funds of real estate enterprises are in trouble, loans will easily become bad debts. It is also a rational choice to withhold loans.
We should have a correct understanding of credit for real estate. There is the theory of "financial accelerator" in macroeconomics, and real estate has the function of financial acceleration. Real estate creates assets that can be pledged to borrow money. On the contrary, once the real estate credit contract, the credit of the whole society will contract. Therefore, if this "financial accelerator" industry is hit, the economy will shrink.
Are there enough houses for ordinary Chinese? I think it is not enough. Compared with the developed countries, we still have much less. Some people say that so many real estate companies are about to go bankrupt because of high debt, which brings systematic risks to China. However, the problem is that high debt ratio is an industry characteristic of real estate and cannot be simply referred to by other industries such as manufacturing. Now financing is suddenly cut off, leaving them with nowhere to borrow money. The liquidity will only be worse, the bankruptcy will be faster, and the possibility of systemic risk will be greater.
We are constantly seeing the failures of real estate enterprises, among which there are many large real estate enterprises. However, the main reason for their failure is that they are keen on diversification and divert the funds originally for building houses to other purposes, such as building cars and venture capital, etc., which they don’t have expertise in, resulting in losses. Real estate-focused companies are not having big problems. It is not right to deny the entire real estate market and rectify it all because of the problems of individual developers.
Personally, I think the mistakes of the "three red lines" should be admitted and corrected as soon as possible. In particular, the first red line proposed that the debt ratio after deducting the pre-sale amount should not exceed 70%. However, our housing companies rely on pre-sales. Perhaps that is not right in itself. The United States and other countries do not do so (rely on pre-sales), but the policy should give housing companies a buffer period. About half of the real estate companies have stepped on this red line.
The second red line, i.e. the debt-to-equity ratio does not exceed 100%, is acceptable.
The third red line requires that the cash-to-debt ratio should not be less than 1, which is puzzling. If I have a lot of cash in my hand, why should I borrow? The reason why we want to develop finance is for people who do not have so much money and want to do things. They have to borrow money first.
Therefore, I think, if China's economy wants to have a decent recovery in the second half of the year, it cannot do without the adjustment of the "three red lines" of the real estate industry.
If we can adjust the COVID-10 control policy and make good rectification on the "three red lines" of real estate, we can reach the potential growth rate of 6%, or even 7.8%, so as to achieve the target of 5.5% for the whole year. Otherwise, it will be very difficult to achieve the economic growth target for the whole year, and other problems caused by the severe economic downturn will not be ruled out.
徐高 XU Gao, Chief Economist of the Bank of China International Co. Ltd. and adjunct professor of National School of Development in Peking University. The Chinese-language speech.
The economy is "cold inside and hot outside" and the momentum of recovery is not strong.
The peak of the 2022 COVID-19 outbreak shock has passed. According to the data, the daily average passenger capacity of the subway in ten major cities has increased significantly, approaching the level before this outbreak. Of course, due to the highly contagious nature of the Omicron variant, there is still a high degree of uncertainty about the future direction of COVID-19 pandemic, and there may be twists and turns.
With the impact of COVID-19 weakening, the domestic economy has been significantly repaired. In June, the manufacturing Purchasing Managers Index rebounded to indicate expansion. However, judging from the sub-indicators of PMI, the current "internal cold and external hot" trend of China's economy on the demand side is quite obvious.
In June this year, the "new export orders" index in China's PMI rose significantly. At the same time, the "new orders" index, which reflects the sum of domestic demand and external demand, has seen a rather limited increase. If the difference between "new orders" and "new export orders" is used as the indicator of domestic orders, we can find that the current domestic orders are rather weak, indicating weak domestic demand. Therefore, the improvement of China's aggregate demand in the last two months is mainly driven by external demand.
Domestic orders have fallen to their lowest level in recent years (source: Wind)
The current situation of "internal cooling and external heating" in China is very different from that of "internal cooling and external cooling" in China in the second quarter of 2020. In the second quarter of 2020, with the spread of the epidemic in the world, China's export dropped twice. However, at the same time, domestic demand has been significantly boosted by the domestic steady growth policy, thus enabling a strong economic recovery. However, at present, as the United States is aggressively tightening monetary policy and the global economic boom is also declining, the outlook for external demand is not optimistic. Against this background, domestic demand is so weak that the recovery of China's economy in the next few quarters may be significantly less than in 2020.
At present, the main source of weak domestic demand in China is the real estate industry. China's real estate investment growth rate entered a downward path in the second half of 2021 and has not changed significantly so far. Although China has issued a series of policies to stimulate infrastructure investment in the first half of 2022, the growth rate of infrastructure investment has increased.
Although the total scale of infrastructure investment is equivalent to that of real estate investment, its driving force on upstream and downstream industries is weaker than that of real estate, so it is difficult for the upward trend of infrastructure investment to completely hedge the downward trend of real estate investment. Therefore, even if the policy is strong in infrastructure investment, the weakness of domestic demand due to real estate will be difficult to change.
Let's focus on the real estate industry. It can be said that the current state of weakness in China's real estate industry has not been seen in more than a decade. In the second half of 2021, the growth rate of several core indicators of China's real estate industry has entered a downward path. At present, the year-on-year growth rates of the total area of sold apartments, new housing construction area, and the total area of land sold for real estate has all dropped to the lowest level in more than a decade.
The growth rate of core real estate indicators is at the lowest level for more than a decade (source: Wind)
What worries the real estate industry most is not that the growth rate of various core indicators has been at a low level for more than ten years, but that the industry is currently in an abnormal vicious circle. Real estate is an industry in the real economy that is quite sensitive to changes in interest rates. Lower domestic interest rates tend to lead to improved property financing. Take personal housing mortgage loans as an example. In several cycles over the past decade or so, the growth rate of mortgage loans will obviously increase after the domestic national debt interest rate falls for three quarters. However, in the past year, the interest rate of government bonds has already dropped, while the growth rate of mortgage loans has continued to drop, hitting a 10-year low. The current trend of such a deviation between mortgage loan growth rate and government bond interest rate has never occurred in the past ten years or more.
The growth rate of personal mortgage loans has significantly deviated from the trend of government bond interest rates in the past year (source: Wind)
Obviously, the easing of domestic monetary policy in the past year has not been transmitted to real estate. The reason is that the tightening of credit for real estate, such as the "three red lines" policy, is too strict and triggered the downward trend of the industry and pushed the industry into a vicious circle. On the one hand, the financing of real estate developers has tightened and credit risk has increased; On the other hand, stakeholders’ confidence in the real estate industry has declined, which is mainly reflected in banks' reluctance to lend to real estate developers and buyers' mentality of afraid of buying an apartment because they are worried about the delivery. These two factors reinforce each other, causing the real estate industry to enter an abnormally weak state. The real estate industry can hardly break this vicious circle by itself.
The vicious circle originates from misunderstandings
The reason why the real estate industry has fallen into a vicious circle of financing contraction in the short term is, to a large extent, the result of the overly stringent real estate financing tightening policy. The reason why the policy is always tightening is mainly due to some long-standing misconceptions about the real estate industry. Only by rectifying the understandings can the policy be rectified and the real estate industry be brought back to normal.
One of the misconceptions is that our country has built enough housing in cities.
At present, the per capita living area of cities in mainland China has reached 40 square meters. This figure may seem quite large, but it is still lower than the per capita living area of Taiwanese and Japanese cities. Referring to the experience of Taiwan and Japan in China, it is hard to say that each urban resident in mainland China should only live in a house of 40 square meters per capita.
The per capita living area of cities in the Chinese mainland continues to be lower than that of Taiwan and Japan.
Precisely because the main reason for the high house price is the shortage of supply that the policy of regulating demand cannot change the long-term trend of house price increase. Of course, the rise in house prices will indeed stimulate investment and speculative demand, which in turn will further push up house prices. If the real estate speculation is not controlled, the real estate speculation and the rise in house prices will be mutually reinforcing, which will inevitably cause the house prices to rise too fast. However, only restraining the real estate speculation on the demand side, but not effectively increasing the supply of land and real estate, cannot solve the long-term contradiction of short supply and short demand in the real estate market, and thus can only restrain the rise of house prices in the short term.
China's urbanization is still in progress. Every year, tens of millions of people have to move from the countryside to the cities. The incremental housing needs generated by these urban populations need to be met. In addition, the housing improvement needs of urban residents in our country are far from being satisfied. In fact, our people's yearning for a better life is mainly reflected in living in bigger and better houses. In terms of quantity and quality, the housing supply in our cities is inadequate. There is a need to correct misconceptions that our country has built enough housing in cities.
The second misconception is that speculation is the main reason for the rise in house prices.
Rising house prices have always been the focus of attention. Some people think that the hype in the real estate market has pushed up the house price. Therefore, the government has issued more and more stringent policies to suppress the demand for real estate to curb speculation and thus control the house price.
However, house price is a price index that reflects the balance between supply and demand. We need to find out the reason for the change in both supply and demand. Higher house prices mean the property market is in short supply. It is difficult to estimate exactly how much of the current demand for real estate comes from speculation. However, considering that the policy on the demand side of real estate is already quite strict and the transaction cost of real estate speculation is already high, I believe that the contribution of real estate speculation to real estate demand should not be large. The main body of current real estate demand is still the "real need" from first-time homebuying and the “need from improved housing.”
From the data, the shortage of land and real estate supply in our country is a more important reason for the rise in house prices. In the development history of our country's real estate market, 2004 was a watershed. On August 31, 2004, the Ministry of Land and Resources and the Ministry of Supervision jointly issued the 《关于继续开展经营性土地使用权招标拍卖挂牌出让情况执法监察工作的通知》"Notice on Continuing Law Enforcement and Supervision of Bidding, Auction and Listing of Commercial Land Use Rights" (i.e. "Decree 71"), which requires that from August 31, 2004, all land transfers must be carried out by means of "bidding, auction, and listing".
That objectively increased the degree of monopoly supply of urban land in our country and tightened the supply of land and real estate, which in turn pushed up house prices. Before 2005, the average annual increase in the area of land purchases for housing in China was about 30%. From 2005 to date, the average annual growth rate is negative. The growth rate of the completed housing area also dropped big in 2004, from an average annual growth rate of 20% before 2005 to an average zero growth rate since 2005. With that in 2004, the house price in our country has entered a stage of rapid increase.
After 2004, the growth rate of completed housing and area for land purchases for real estate in our country has dropped significantly. (source: Wind)
Precisely because the main reason for the high house price is the shortage of supply that the policy of regulating demand cannot change the long-term trend of the price increase. Of course, the rise in house prices will indeed stimulate investment and speculative demand, which in turn will further push up house prices. If the real estate speculation is not controlled, the real estate speculation and the rise in house prices will be mutually reinforcing, which will inevitably cause the house prices to rise too fast. However, only restraining the real estate speculation on the demand side, but not effectively increasing the supply of land and real estate, cannot solve the long-term contradiction of insufficient supply, and thus can only restrain the rise of house prices in the short term.
In fact, if the real estate speculation is mistaken as the main cause of the rise in house prices, the real estate control policy will be difficult to suit the situation, but it is possible that the opposite will happen. The "centralized land supply" policy that began in 2021 is an example. The original intention of the “centralized land supply” policy is to curb the speculation in the land market, and thus curb the excessive growth of house prices and land prices. But objectively, the centralized land supply policy has increased the degree of monopoly supply of land, thus allowing the land price to rise faster, thus planting seeds for the rise in house prices.
In the first half of 2022, affected by the policy of centralized land supply, the area of purchased land for housing of our country experienced a deep negative growth, with the growth rate reaching a new low for more than a decade. At the same time, the growth rate of land purchase price in our country has been significantly higher, once reaching a 10-year high. The contrast between the two has never been seen in the past decade. It is hard to say that such an outcome will help curb the rapid rise in house prices, or that it is the outcome that policymakers wanted. One can see from this the consequences of misunderstandings.
In the first half of 2022, while the growth rate of land sales was deeply negative, the price increased significantly (data source: Wind)
The third misconception is that real estate investment and infrastructure investment are not sustainable.
The third misconception about the real estate industry is directly related to China's infrastructure investment. Although real estate investment and infrastructure investment together account for half of China's fixed asset investment and have long been the two major domestic demand engines of China's economic growth, many people still believe that these two are unsustainable and the main source of risks for China's economy.
At first glance, infrastructure investment does seem to have the problems of low return on investment and high debt burden. The main body of investment and financing for infrastructure investment is the local government financing vehicles. (LGFVs). These state-owned enterprises are funded and established by the local government and are the main body to finance and invest in infrastructure projects. Summing up the financial data of thousands of LGFVs in our country, we can find that the average return on investment (return on total assets) of LGFVs has decreased to 2% in 2021. However, at the same time, the average interest rate for bonds issued by the LGFVs is 4.5%. In the eyes of many people, the return on investment of the financing platform is far lower than its financing cost. It can only be maintained by constantly borrowing the old and the new. Its debt risk will become higher and higher. Therefore, the infrastructure investment undertaken by the LGFVs is not sustainable.
This pessimistic view of infrastructure is biased and is a misreading of China's real estate infrastructure model. Looking at infrastructure investment alone, there is indeed a problem that the return on investment cannot cover the financing cost. Looking at real estate investment alone, it is also linked to the much-criticized “land finance.” However, if we look at infrastructure and real estate together, we can see that they are the business model of the local government's "city management" and the magic weapon of China being called an "infrastructure maniac" and its rapid economic growth.
The return on infrastructure investment is largely reflected in the societies, which is reflected in the externalities created by the investment projects and is difficult to be converted into the project's own revenue. The above-mentioned average return on investment of LGFVs of 2% is not a fair evaluation of the return on investment in China's infrastructure. This is because the overall [including external] benefits created by infrastructure projects are not included in them. Precisely because infrastructure projects have the characteristics of great overall [including external] benefits and low return rate of the projects themselves that countries all over the world will encounter financing bottlenecks when making infrastructure investments. Generally speaking, although infrastructure investment is beneficial to the country and society, it does not earn money, so few people are willing to pay for it. U.S. President Joe Biden announced an ambitious multi-trillion-dollar infrastructure investment plan after taking office, but it failed in the end. That is the reason.
In our country, relying on the business model of real estate and infrastructure based on public ownership of land, the sustained and rapid growth of infrastructure investment has been achieved. The overall effect of infrastructure investment is largely reflected in the appreciation of land. The local government can realize the benefits of infrastructure investment through land sales (“land finance”). In this way, the local government borrows money from LGFVs to make infrastructure investments and then uses the land sales revenue to repay the previous debts, thus matching the cost and benefit of infrastructure investment on the bigger level and providing a commercial basis for sustainable development of infrastructure investment.
If we can't understand the business model of real estate plus infrastructure in our country as a whole, we will naturally be unable to see the reasonableness of this business model and will easily enter into the misconception of seeing only trees but not forests. It is also under the interference of such misconceptions that China's policies on real estate regulation and local government financing are too tight in recent years, thus making the real estate plus infrastructure model face more and more resistance.
In the eyes of those who cannot understand China's economy from a global perspective, the current pressure on real estate and infrastructure just shows that China's real estate and infrastructure are inherently unsustainable. This is just like a person who has never seen a bicycle before and only thinks intuitively that a bicycle with only two wheels cannot keep balance and will definitely fall down. To make matters worse, the person also stopped a normal bicycle and even described the effort as trying to defuse the risk of a fall-down. Of course, the stopped bicycle will naturally fall down as it is difficult to maintain its balance. But obviously, the reason why the bicycle fell down was the wrong perception of the person who stopped the bicycle, not the bicycle.
Measures for Solving the Difficulties of the Real Estate Industry
It can be seen that the current predicament of the real estate industry is mainly caused by the over-tightening policies, which reflects some misunderstandings of the real estate industry. It's better for the doer to undo what that person has done. At present, the policy should be adjusted to break the vicious circle of the real estate industry.
First, there is a need to relax the financing policy over the real estate industry. The original intention of the "three red lines" policy is good, but it also needs to be adjusted according to changes in the situation. When the real estate industry is caught in a vicious circle and the whole industry may have systemic risks due to the liquidity crunch, it is necessary to shift the focus of the real estate financing policy, and to help the industry tide over the difficulties by providing adequate financing support to real estate developers, so as to safeguard the bottom line of no systemic crisis.
Second, establish the real estate industry short-term relief fund to eliminate the credit risk of real estate developers and help the industry return to normal. At a time when the property industry is in a vicious circle, it may not be enough to just relax the regulatory policies on property financing. Faced with the current high credit risk of real estate developers, banks' reluctance to lend and buyers' reluctance to purchase are hindering the flow of financing to the real estate industry. At this time, it is necessary to eliminate the industry credit risk through the government credit to the real estate industry, and unblock financing.
I suggest that the government should set up a "stabilization fund for the healthy development of the real estate industry" to resolve the current predicament of the real estate industry. This is a short-term relief fund for the real estate industry, funded by the government, together with funds raised from the market, bringing together a trillion yuan. The fund should acquire shares in private property developers and become a minority shareholder in those developers. The fund does not seek to hold these shares in the long term, but only helps private property developers to tide them over by taking short-term stakes. A stake in the fund could reduce developers' credit risk and rebuild banks' and buyers' confidence in them. In this way, banks will be more willing to lend to these developers, and ordinary people will dare to buy new houses, thus quickly breaking the vicious circle of the real estate industry. After the real estate industry returns to normal, the rescue fund can withdraw at a timely profit.
Third, apart from the short-term emergency, we should also push forward the supply-side reform of the real estate industry in the longer term and build a more price-flexible land supply system to better achieve the goal of "houses are for living, not for speculation". The key reason why the problem of high house prices cannot be solved for a long time is that the price elasticity of land supply in our country is too low, which makes house prices unable to effectively guide the allocation of land resources. In terms of the total amount, the increase in house prices has not brought about a corresponding increase in land supply, so it is difficult to stabilize house prices through the increase in land and real estate supply. Structurally, there is a mismatch between the regional distribution of house prices and the regional distribution of land supply. In cities and regions with high demand for real estate and high house prices, land supply is not necessarily large, which leads to a spatial mismatch between the supply and demand of real estate and further increases the contradiction between supply and demand of real estate in large cities of developed regions.
Therefore, it is necessary to make "supply-side reform" in land supply, so that house prices can play a more important role in the allocation of land resources. Increase the supply of land when house prices rise rapidly; When house prices rise slowly, the supply of land is reduced. Increase the supply of land in areas where prices are higher; Those areas with lower house prices have reduced the supply of land. In this way, we can give full play to the role of the real estate market in the allocation of resources and eliminate a series of distortions caused by the excessive focus of policies on the demand side of real estate.
Of course, rectifying the misunderstanding of real estate is more crucial. Only by correctly recognizing the fact that China's residents' housing needs are far from being satisfied, the contradiction between supply and demand caused by insufficient land supply is the most important reason for the rise in house prices, and the sustainability of the real estate+infrastructure model and its important role, can real estate regulation and control find the key and properly implement policies, so that the real estate market can run more smoothly and healthily, and people can also have a stronger sense of empowerment in real estate.
Is there any data on the degree to which speculation is linked to house prices? Anecdotally, it seems that many people who have one apartment own multiple apartments, and at least some of them sit vacant for speculation purposes. But how much? Even these guys don't seem to know. Does anyone?
Also, while these guys are making reasonable arguments, they seem to downplay the fact that many real estate developers have been extraordinarily cavalier and mismanaged. They also seem overly (naively?) confident that the central government would ever be willing to admit to a mistake or do a reversal on a policy they have taken a strong stance on supporting--particularly in terms of 'dynamic Covid-Zero' but also in terms of the 'three red lines' policy. An about face seems incredibly unlikely, though some easing around the edges may be possible.