Opinion: House pre-sale ban reconsidered
By Xin Bei (China Daily)
Updated: 2005-08-26 06:02

But such a supposition is over-simplified and detached from the reality of the domestic property market. The current sales pattern is deeply rooted in the country's financial structure.

As China began to reform the welfare housing system in the late 1990s, there were no financial institutions except banks providing funds for property developers that needed to buy land and build houses. Even now companies specializing in housing finance exist only on paper.

As a result property developers resort to pre-sales to collect at least part of the needed funds via house buyers' mortgage loans for construction.

It was a lack of financing channels that predetermined the property sector's heavy dependence on bank funds. To address this problem the obvious option is to further accelerate reform of the financial sector to diversify channels for funds.

With attention focusing on the health of domestic banks, unfortunately, the central bank has failed to demonstrate the broad view needed to balance financial stability and economic development.

Though in theory a ban on house pre-sales would in a roundabout way help reduce banks' exposure to inflated property assets, it would not be able to raise banks' risk awareness to the level ingenious commercial lenders could attain.

If property developers suddenly ran out of funds, the ongoing slowdown in the real estate market may turn into a collapse of a pillar industry a shock the economy could not bare.

To the dismay of house buyers, reduced supply will only push up prices further before they eventually nosedive. The pre-sale price is usually lower than the price of finished houses.

Rampant scams centring on the quality of pre-sold houses must be promptly dealt with by holding property developers accountable.

In this regard, more legislative efforts and stricter enforcement are needed to protect individual consumers' rights against malfeasant developers.

As to the financial risks, it is up to banks to make better judgements with due prudence and proper internal controls.

In short, the central bank's suggestion of a ban on home pre-sales will not get to the heart of the serious problems in the property sector.

Given the present conditions, the Ministry of Construction has this time made the right choice by refusing to accept a measure that at best would be a stopgap.