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Real Estate: Wheezing Lows

Jun 22-2022   



Short-term measures to boost the real estate industry are effective and efficient in addressing liquidity risks and averting systemic financial crisis, but can’t stimulate the economy as expected, said Prof. Zhao Bo of the NSD in a recent forum. He advised adjusting relevant policies, notably the ‘Three Red Lines’, to have a better chance of achieving the 2022 growth target.

 

In force for nearly six years, policies centered on the overarching guideline that houses are for living in and not for speculating on have significantly slowed down housing price increases and stabilized the rent-to housing price ratio in major cities. The period has also seen the unexpected debt defaults of certain realty developers, leading the government to put forward measures to tackle the issues beleaguering the industry, namely high debt ratio, high leveraging, and high turnover rate, observed Prof. Zhao. Hence the ‘Three Red Lines” adopted in August 2021 to subsume developers under different risk categories. Several more measures have since come into force.

 

Prof. Zhao noticed that the real estate industry has taken a blast to its liquidity, as partly evidenced by its falling share of domestic loans. As a result, developers have significantly cut down on investments or land purchases. Decline in personal loans and change in social financing patterns also point to the quandary of the property market.

 

This year a flurry of moves has been made to loosen the straightjacket in over 130 cities. The Central Bank has lowered the 5-year loan prime rate (LPR) by 20 basis points, a first in many years. According to Prof. Zhao, such measures have played a positive role in averting large-scale quantitative easing and latent financial risks, as well as facilitating the sale of housing inventory and improving the liquidity of realty firms; however, they have to contend with the lingering effects of previous measures and thus can hardly spur the real estate industry as powerfully as expected.

 

What also deserves attention is the contribution of real estate investment to GDP growth, which might be less significant than common belief, said Prof. Zhao. In fact, the rate has decreased from 1.6% in 2009 to less than 0.4% currently. Prof. Zhao’s research also showed that the pulling effect of the real estate industry on other industries might have been overblown. In terms of income and wealth effect, a decrease in mortgage rate leads to an increase in residents’ disposable income, which in turn gives rise to more outlays for consumption; housing price increases add to the wealth of house owners but pile on additional costs for house buyers and renters, thereby preventing the wealth effect from fully materializing.

Real Estate: Wheezing Lows

Jun 22-2022   



Short-term measures to boost the real estate industry are effective and efficient in addressing liquidity risks and averting systemic financial crisis, but can’t stimulate the economy as expected, said Prof. Zhao Bo of the NSD in a recent forum. He advised adjusting relevant policies, notably the ‘Three Red Lines’, to have a better chance of achieving the 2022 growth target.

 

In force for nearly six years, policies centered on the overarching guideline that houses are for living in and not for speculating on have significantly slowed down housing price increases and stabilized the rent-to housing price ratio in major cities. The period has also seen the unexpected debt defaults of certain realty developers, leading the government to put forward measures to tackle the issues beleaguering the industry, namely high debt ratio, high leveraging, and high turnover rate, observed Prof. Zhao. Hence the ‘Three Red Lines” adopted in August 2021 to subsume developers under different risk categories. Several more measures have since come into force.

 

Prof. Zhao noticed that the real estate industry has taken a blast to its liquidity, as partly evidenced by its falling share of domestic loans. As a result, developers have significantly cut down on investments or land purchases. Decline in personal loans and change in social financing patterns also point to the quandary of the property market.

 

This year a flurry of moves has been made to loosen the straightjacket in over 130 cities. The Central Bank has lowered the 5-year loan prime rate (LPR) by 20 basis points, a first in many years. According to Prof. Zhao, such measures have played a positive role in averting large-scale quantitative easing and latent financial risks, as well as facilitating the sale of housing inventory and improving the liquidity of realty firms; however, they have to contend with the lingering effects of previous measures and thus can hardly spur the real estate industry as powerfully as expected.

 

What also deserves attention is the contribution of real estate investment to GDP growth, which might be less significant than common belief, said Prof. Zhao. In fact, the rate has decreased from 1.6% in 2009 to less than 0.4% currently. Prof. Zhao’s research also showed that the pulling effect of the real estate industry on other industries might have been overblown. In terms of income and wealth effect, a decrease in mortgage rate leads to an increase in residents’ disposable income, which in turn gives rise to more outlays for consumption; housing price increases add to the wealth of house owners but pile on additional costs for house buyers and renters, thereby preventing the wealth effect from fully materializing.