China’s latest policy for deflating the property bubble merely buys time, instead of offering relief

Real estate is the driver of the Chinese economy. By some estimates, it accounts (directly and indirectly) for as much as 30 per cent of gross domestic product.

Keeping housing prices buoyant and development robust is thus an overriding imperative for China - one that is distorting policymaking and worsening its other economic imbalances.

Despite reforms in recent years, there’s little question that Chinese real estate is in bubble territory. From June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings, rose 31 per cent to nearly US$202 per square foot.

That’s 38 per cent higher than the median price per square foot in the United States, where per-capita income is more than 700 per cent higher than in China. Not surprisingly, this has put home ownership out of reach for most Chinese.

Worried about these prices, and about growing indebtedness among developers, China’s State Council has hatched a plan to encourage rentals. It will offer tax breaks to developers that rent out some of the housing they planned on selling, and will prod financial institutions to “provide support for companies in the residential rental sectors.”

This is a thoroughly misguided way to address the problem.