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After car, time for housing boom
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11:06, May 15, 2009

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By Li Hong, People's Daily Online

An online reader's comment complaining the country's housing market, which seemingly speaks for a majority of potential Chinese home buyers longing for even steeper price dives, struck me.

It said: The decline of home prices now is so encouraging that "we all should snap shut our pockets, and keep wishing for the collective downfall of the real estate developers, local governments and commercial banks which feed first and then profit from the previous bubbles".

The cooling started in the United States last year, as the sub-prime mortgage debacle has snowballed, taking hundreds of lenders, companies and jobs worldwide down with it. The Obama administration is working round the clock to fix a teetering economy, by bailing out failing banks and auto giants, to stem a recession from exacerbating and prolonging.

China's housing market is no better. After the U.S. housing frenzy fizzled last year, the bust sent immediate ripples across the Pacific. The prices in Shenzhen, Guangzhou, Dongguan and other cities in the South have plummeted by more than 30 percent since the end of 2007, figures show. Weekly or monthly transactions tumbled in Beijing, Shanghai, Tianjin, Chongqing and all the major cities in the country, as the wait-and-see mood has developed among the potential buyers. Heavier discounts or refunds in the form of free appliances and inner refurbishing by property developers have failed to lure buyers back.

Although China is not harmed by skyrocketing cases of foreclosures, as happening in the United States, a nationwide house sales lull will certainly complicate government efforts to arrest a backsliding economy, and create millions of urgently-needed jobs.

However, in the newspapers and online chat-rooms, legions herald the price decline and call for more. Some even advocate a boycott -- stopping buying houses for six months or longer -- and bring the prices to the ground.

I sympathize with them, but won't take their stand. First, the Central Government in Beijing won't sit idle and let the worst scenario happen. Secondly, I firmly believe that a housing meltdown in China, on a scale identical to the year-long US mortgage troubles, will hurt everyone in the end.

A precipitous economic slowdown in China, which economists call hard-landing, will not only jeopardize Chinese dream of longing for sustainable prosperity, but also have international complications, making the cloudy world economy outlook even gloomier. Perhaps the country is not yet at the stage of acting as major engine for global economy, it could do its bit to coffer its slide.

It is natural and justified for any individual home-buyer to keep a tight wallet and wait for the best time to clinch his/her bargain. A boycott, however, is uncalled for. It will hold the normal market supply and demand hostage, force property developers to the wall, and eventually, seriously harm the financial safety of Chinese banks. As seen in Shenzhen and other cities, those who bought houses on mortgages in 2007 when the prices peaked, now are reluctant to see to their former mortgage terms and some have decided to default on loans. If the prices continue decreasing, more defaults could ensue, threatening the money line of the lenders.

The housing market of the United States is a mirror. Remaining in the quagmire of toxic mortgage securities, some US financial firms have collapsed and more are struggling to survive. U.S. government has rushed to their rescue, because the financial stability is critical to a country's economic stability.

So, a volatile housing market is one of the biggest threats to the Chinese economy. Helping stabilize the market is of vital importance. Once the prices go down, the market psychology prevails that consumers will continue to call for more reductions, resulting in a sales doldrum. The longer the slump lasts, the graver the danger it poses to bankers.

In addition, declining home values, which will tend to make people feel less wealthy and less inclined to spend in the months ahead, represent significant downside risks to China's economy. As exports have tumbled by a quarter in the past months in 2009, only domestic consumption and investment will enable China to stand above the water.

The government needs to act now, by revamping its previous hard-line policy to make house loans easier, more inexpensive, and readily accessible, to reduce taxation on house transactions, and may consider imposing much lower taxations on 2nd and 3rd house investment, provided the prerequisite of a mandatory 20 percent down payment is met, which will effectively prevent foreclosures and thus ensure bank safety.

For the good of the economy, it is now time to reignite the housing boom, after Beijing's earlier measure to induce a car buying spree by lowering taxes has succeeded.

The article represents the author's view only. It does not represent opinions of People's Daily or People's Daily Online.

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