(China Daily)
Updated: 2008-02-02 10:26

Unlike developed countries, the fall in housing prices in China will stimulate rather than reduce consumption, says an article in Oriental Morning Post. The following is an excerpt.

Following the fall of house prices in the United States, China's housing prices have also become sluggish. People are wondering whether this would affect domestic consumption and economic growth.

We believe that the fall in our housing prices is different from that of the US. In the US an individual owns his or her land, and gains from the appreciation of the land also belongs to the individual. In China, land is owned by the State or a collective group and the major beneficiaries of land appreciation are the government and State-owned enterprises.

Therefore, when land prices increase, so does the revenue of the government and enterprises, and people tend to save more than they spend.

The US has a well-developed property market where proceeds from sales can be banked by house-owners. In China, the market is not that well developed. A rise in property prices does not stimulate domestic consumption.

In the US new houses do not come on the market as rapidly as China. Thus when prices increase house-owners benefit and consumption goes up. When prices drop so does consumption.

Sales of newly-built houses account for 17 percent of the total retail revenue in China. So the price rise of houses has to some extent an effect on domestic consumption, but not to a great degree as in the US.