Rescuing the Housing Market

By CHENG XIAOBEI

OVER a decade ago, people used to take delight in telling a story contrasting Chinese and American consumption habits. After saving for a lifetime, an old Chinese lady finally buys a new house just before she passes away. An American lady buys a house with a loan, and finishes paying it off just before she passes away. The story was a criticism of Chinese styles of consumption.

    Chinese people were greatly enlightened by this tale and quickly grasped new consumption patterns. After the housing market was introduced, an ever-increasing number of Chinese people purchased their own home using borrowed money. In 2007, 760 million square meters of commercial housing were sold in China, a year-on-year growth of 24.7 percent.

    The price for commercial housing has consequently soared, and reached its peak in the middle of 2008. In June that year, the average price for one square meter of housing in Shanghai was RMB 17,000. However, the average monthly disposable income for Shanghai urban resident just exceeded RMB 2,000 per head, meaning the average person could afford just 1.5 square meters a year.

    The ever-growing real estate bubble was burst by the onset of the global financial crisis, and by December 2008, Shanghai's average housing price had slumped to less than RMB 12,000 per square meter. The real estate market in China has fallen by around 30 percent, and in some places by as much as 50 percent. Housing turnover also fell significantly. In 2008, the floorage of commercial housing sold in China was 600 million square meters, a drop of more than 20 percent compared to 2007. Furthermore, 130 million square meters of empty housing are found across the country, evidence that most consumers are taking a wait-and-see attitude.

    According to insider calculations, the real estate industry accounts for one-quarter of China's investment in fixed assets, and involves more than 50 industries. For every million square meters of reduced construction, 300,000 people's jobs will be affected and demand for steel will drop by 20,000 tons. Consequently, to avoid exacerbation of the economic slowdown by follow-on effects resulting from the real estate crash, the government has launched various short-term taxation and credit measures to stimulate housing consumption.

    Taxation has always been a means by which government can control, and make adjustments to, the market, so changes in this area can be regarded as a barometer of the housing market. In 1999, "to coordinate the national reform of the housing system, and effectively enliven the real estate market," the Ministry of Finance and the State Administration of Taxation decided to "temporarily halve the deed tax," from three to 1.5 percent. As the real estate market heated up, this reduced rate was only applicable to apartments of less than 90 square meters from 2002. During the boom of 2007, the actual deed tax for newly purchased housing in most areas was three percent or even higher. This situation changed as the market declined at the end of 2008. Last November, the Ministry of Finance cut the tax rate to one percent for first-time buyers of ordinary housing of less than 90 square meters, and made housing transactions exempt from stamp duty. In certain areas, such as Nanjing, the government waived deed tax altogether for people buying residential properties of less than 90 square meters.

    Policies regarding the reselling of private housing have also changed. To stop housing speculation, in June 2006 the government implemented a five percent business tax on the aggregate selling price of private housing resold within five years of the original purchase. This policy was adjusted on the first day of 2009, so that ordinary private housing can now be sold after two years of the original purchase without paying business tax; for those selling within two years of the purchase, the business tax is levied only on dividends above the buying price. This will undoubtedly stimulate the second-hand housing market.

    Since the second half of 2008, several interest rate cuts have seen the housing loan rate decrease by 30 percent, and the five-year lending rate of the Housing Accumulation Fund has dropped from 5.22 to 3.87 percent. Furthermore, the central bank allows financial institutions to grant a 70 percent discount off benchmark lending rates for purchases of ordinary housing. However, while this measure was superficially embraced by commercial banks, in practice it was rejected. If the 70 percent discount had been implemented, the lending rate would have been lower than the deposit rate, and banks would have borne a loss.

    Meanwhile, the down payment required on housing loans has dropped from 30 percent of the sales price to 20 percent, and the loan limit of the Housing Accumulation Fund increased from RMB 400,000 to 600,000 or higher.

    Tax cuts obviously reduce the government's fiscal revenue, and reducing loan thresholds increases overall operating risks in the financial system. Now there is a new version of the house-buying story doing the rounds: the old American lady is suffering under the subprime mortgage crisis and her house has been seized by the bank. The old Chinese lady is preparing to buy another house for her son with a loan. But the old Chinese lady needs to learn from the American lady, so as not to repeat her mistakes. Only rational prices in the housing market can really stimulate consumption.