Beijing's housing policy challenge
Local government, which depends on revenue from property sales to finance services and infrastructure, has combined in the past with developers to get around policy measures to cool the mainland property market. Now sustained tight credit, a huge oversupply of housing and negative sentiment have combined with administrative moves to rein in soaring prices.
A record number of mainland cities - 64 out of 70 tracked by the National Bureau of Statistics - reported a drop in new home prices last month. Following falls in 55 cities the previous month, this signals a deepening downturn in a market that has been in a correction cycle for some time. More than 30 local governments have loosened home-purchase restrictions in a largely ineffective attempt to stem the slide. Many market players believe these efforts will continue to have only limited effect. Nor do they expect selective easing by monetary authorities including reducing banks' reserve requirement ratios to channel much credit to the property market.
Investors remain reluctant to buy while there is still uncertainty about whether prices have bottomed out. Developers under pressure to reduce inventories and generate more cash flow are facing a challenge in finding a price level that will entice buyers back. This dilemma has been compounded by very tight mortgage pricing, with many banks charging small premiums on the benchmark rate. That said, mortgage approvals have been fast-tracked recently, with some banks offering the benchmark rate or even a small discount.
A further slowdown in housing sales, which also impact on related activity such as manufacturing and retailing, will weigh on an economy only just on track to meet its growth target. With the latest manufacturing data suggesting the momentum of economic recovery may be slowing, market players and local government will be hoping policymakers overcome aversion to risking another bout of housing inflation and yield to pressure for more policy easing. Having reined in a price spiral, Beijing needs to loosen carefully so as not to trigger another.