Wen's efforts to cool property prices aren't working - yet
It is a measure of how rattled China's leadership has been by rising property prices that Premier Wen Jiabao chose to mark the weekend's May Day holiday by visiting a Beijing construction site. He donned a hard hat and promised once again to get a grip on the country's soaring real estate market.
'We are determined to bring down high-flying housing prices and to make sure that the price of housing returns to a reasonable level,' Wen declared.
'Our determination is unswerving,' he added to ram the point home.
Clearly, Wen and his colleagues are deeply disturbed by mounting popular discontent over the unaffordable price tags on mainland homes. After prices in many cities climbed 25 per cent or more last year, the cost of even a modest family flat typically exceeds 20 times the annual income of would-be buyers, shutting millions out of the market and triggering a barrage of complaints.
In response, the government has introduced a swathe of measures designed to cool the market. Last year it imposed new restrictions on mortgage lending and multiple purchases, and slapped a punitive tax on quick-fire resales in an effort to discourage speculation.
More recently the authorities have moved to tighten monetary policy, draining liquidity from the banking system and raising interest rates four times in six months.
Yet although Wen's determination to bring prices under control may well be unswerving, he still faces a problem. The quirky nature of China's property market means that administrative measures like mortgage restrictions have little effect, while prices can react to interest rate increases by rising even faster, at least in the early stages of the tightening cycle.
Slapping loan-to-value limits on mortgages doesn't work on the mainland because as many as half of all buyers pay for their new properties entirely in cash, while most of the rest pay largely in cash. Meanwhile, families have little difficulty circumventing prohibitions on multiple purchases by individual buyers. Stories abound of married couples getting divorced in order to buy second properties.
Raising interest rates may not work very well either. In a research study published in March, Yao Shujie of Nottingham and Xian Jiaotong universities and his colleagues found that, in China, 'a contracting monetary stance is ineffective in curbing house prices'.
They argued that the rapid pace of urbanisation, coupled with demographic shifts, have created a chronic housing shortage in mainland cities despite mass construction programmes.
With property ownership seen as an important badge of status and an essential prerequisite for a man hoping to marry, 'purchasing a house by young people is determined by the timing of marriage, not by a mere interest rate change', they argued. What's more, with home ownership regarded as one of the only reliable investments open to savers, 'when interest rates go up, families are more likely to bring forward their planned purchase rather than suspend or postpone it until interest rates come down'.
It may be irrational, but according to Yao and his co-authors, this rush to buy has created a strong and sustained upward momentum in home prices despite the central government's repeated attempts to cool the market.
On top of all that, local governments, which may rely on land sales to generate half their revenue, have a powerful incentive to encourage continued price rises, regardless of what the central government might want. As a result, the market has gone on climbing, with nationwide prices rising 2.5 per cent so far this year.
However, whether the trend can continue much longer is doubtful. Although prices are up over the past 12 months, as the charts below show, the government's cooling measures have led to a steep fall in transaction volumes.
At some point, with Wen still pledging to bring down prices, it is likely that the irrational sentiment that has propelled the market higher despite the government's cooling measures may go abruptly into reverse.
If, as Yao and his colleagues assert, home buyers take excessively high risks when prices are rising, driving the market higher still, it seems possible that they may well act equally illogically when the market turns around, cutting back too far on the risk they are prepared to run when prices begin to fall, exacerbating the slump.
If so, it would appear the mainland's housing market has only two settings: boom and collapse. In that case, Wen may well need that hard hat, as his determination to control prices risks bringing the market crashing down around his ears.