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Despite cooling measures, in the year's first quarter real estate investment increased 26.9 percent year-on-year, while housing prices continuously rose, although by smaller margins. There are a number of factors contributing to this. First, rapid economic growth created a favorable climate for increased real estate investment. Second, large amounts of capital entered the real estate market because of the favorable macroeconomic climate and positive economic results enjoyed by enterprises. This drove up land property investment. Third, the wait-and-see attitude of the local governments poses a stumbling block to the implementation of the central government's macroeconomic readjustment policy. For example, some local governments are foot dragging in carrying out the central government's policy that small-area apartments (90 square meters or less) make up 80 percent of the total. Furthermore, some local governments prefer to do nothing to reign in runaway housing prices in the absence of administrative pressure from above. This is because rises in real estate prices mean increases in local revenue. Fourth, construction of low-price housing trails demand so low-rent apartments are short of supply. Fifth, speculation in the real estate sector goes largely unchecked. Among other factors, this explains much of why housing prices could not significantly decrease. Interest rates and bank reserve ratios have been raised steadily over the last couple of years to increase the costs of real estate investment and speculation to a certain extent. However, these cost increases pale beside the fat profits reaped from the housing price hike. In fact, it is investment and speculation that power the rise of housing prices. So, rooting out speculative activities in the real estate market provides the right prescription for controlling runaway prices. The increase in real estate markets in the second quarter will fluctuate between 24 percent and 26 percent, by my estimate. The growth usually slows in the second quarter of a year. The forecast is also based on the expectation that the government will take measures to control the growth rate of the economy as a whole, taking into account a context in which the Chinese economy grew at the high rate of 11.1 percent in the first quarter. This is bound to initiate a moderate slow-down of real estate investment in the second quarter, among other things. In sum, the forces working against real estate investment growth are on the ascendancy, while those working in favor of increasing investment are playing out. Why? First, the housing purchasing power is weakening, the number of house deals struck are declining, more potential apartment buyers adopt a wait-and-see attitude and more high-end apartments are sitting unsold, which was rarely seen before. All this indicates that short-term demand is weakening. Or, in other words, the demand is being put off to mid and long terms. In addition, the proportion of low-priced and low-rent apartments is increasing. This is expected to change the orientation of choice of some homebuyers and, in turn, water down short-term demand. Also, the central government is expected to strengthen its efforts nationwide to see that macroeconomic readjustment policies are actually carried out. The effects will be felt in the second quarter and second half of the year. As a result, tax evasion, irregularities in land transfers, behind-the-scene price manipulation and cheating are expected to decrease. In addition, investors and speculators are expected to sell the housing they are holding. This, in turn, is expected to increase the supply of second-hand apartments. So, demand for newly constructed houses will become weaker in the second quarter and in the latter half of the year. Finally, round after round of real-estate price hikes since 2003 have served to separate housing prices from actual value. The degree of bubble inflation and its endurance have both reached their limits. Now, it is time for the price to make a downward turn. This analysis shows that the root causes for excessive real-estate price rises in recent years come from the defects of policies involving real-estate loan expansion, taxation in the land property sector and market management. It is these maladies that have triggered excessive expansion of investment-oriented and speculation-geared housing consumption, which, in turn, set off round after round of sharp price hikes. In view of all this, the government should work out a package of policies to hold investment-purposed and speculation-oriented housing consumption under check, involving mortgages, taxes levied on real estate and use of land resources, and the taxes imposed on possession of land property and its transfer. In addition, strict differentiations should be made between the need to buy houses for living and that for investment purposes, or for sheer speculation. The author is deputy director of the Institute of Economic and Resource Management, Beijing Normal University (
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