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House prices still rising

(China Daily)

08:16, March 19, 2013

Rising house prices have increased the pressure on the central government as it tries to stabilize economic growth.

The average price of a new house increased in 66 of the country's 70 major cities in February. Among first-tier cities, Beijing, Guangzhou and Shenzhen saw month-on-month growth exceed 2 percent.

China's house prices have been on the rise since last summer and the momentum has increased since November.

Last month policymakers announced they would continue the real estate regulations introduced to curb house prices, but the effectiveness of these measures in forcing prices down is yet to be seen. In fact, house prices have been on a rising trend for at least 10 years, and the country's new leaders face a Herculean task trying to bring them under control.

Earlier this month the government introduced some new measures, most notably a 20 percent capital gains tax on profits from house sales, in a bid to take some of the heat out of the market. However, there was a new surge in transactions as people rushed to sell their homes before the new tax came into effect.

Given the relentlessly rising home prices in February, the stance of the central government looks set to become even sterner. However, home prices have soared so high that a major price correction would be a serious shock to the economy as a whole, not just to the real estate sector, so the government needs to use a velvet glove as well as an iron fist in its attempts to tame them.

Fortunately, policymakers still have some cards to play.

Apart from monetary and fiscal policies, they can increase the land available for low-income housing and build more affordable-housing units to dilute demand for commercial housing.

But the key to the problem is reorganizing the fiscal structure to improve the financial viability of the local governments so that they no longer rely on land sales for revenue.

It will take time for such reforms to be drawn up and implemented, so it will be a while before the real-estate problems that are the root cause of the price rises are solved. Until then, policymakers must closely monitor the trend of the market to prevent an asset bubble materializing.

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