2011-03-02 14:27

Responding to the recent frenetic rise in housing prices, the central government in January announced the "new eight points of State Council regulation", showing its determination to cool down the real estate market.

Consequently, up to 17 cities have promulgated restriction orders for homebuyers. The most stringent requirements are that of the Beijing municipal government. People who do not have local hukou, or household registration, have to furnish evidence of paying taxes to the city tax department for the last five years to qualify as homebuyers.

It seems that the Beijing government is trying everything to cool down the property market. Playing the role of an internal "passport", the hukou rule was initially promulgated to prevent "blind flow" of farmers into cities.

As a result, the State could "economize" the cost of urban development, namely saving the cost of housing provision and other subsidies to food and agricultural products provided to urban hukou holders.

Now, hukou is being used to prevent the inflow of real estate-buying capital from heating up the housing market.

This measure will definitely reduce the demand for property and may even bring down housing prices in the short term. In fact, there is some evidence to show that a few property agents went bankrupt because of a sudden decline in the number of customers. But in the long term, the policy will have limited effect on the property market, because the real estate boom has essentially been driven by the structural dynamics of the Chinese economy.

China has seen the accumulation of surplus capital which has become the source of investment in properties, and city governments depend heavily on property development as an important source of their revenue, a phenomenon that can be attributed to tudi caizheng (land-centered local fiscal regime).

People may rebuff this restriction order because it could be detrimental to social integration and even discriminative to migrants. But this is not the point. The policy is irrelevant to rural migrant workers, most of who cannot afford housing in cities anyway. The commodity housing market is not designed for them; they cannot furnish evidence of paying tax in a city because many of them work in the informal sector, a fact that will not change in the foreseeable future.

The policy targets mainly "speculative" buyers in the upper or mainstream housing market. But the real side effect is that it could hamper laborers' mobility when the flow of people, as a result of the labor market's development, is essential to the vitality of the urban economy. The new policy means newcomers will have to live in (private) rented houses for at least five years.

This may not be a problem for those representing the very top end of the labor market such as expatriates, who often come with a company package of rental housing and children's education. In fact in many upmarket estates, foreigners live in houses owned by local Chinese. But the new housing policy may restrict middle-range employees or "talents" from settling down in Beijing. Because of the purchase restriction, the demand for houses to let is increasing which in turn is raising house rents. It is not clear how this demand for mainstream house rentals will be met.

Although the central government simultaneously announced the plan to construct 36 million housing units across the country for social rentals (gong zu fang) and cheaper rentals (lian zu fang) in the next five years, houses to let are subject to design and qualify control and may not be intended to cover or even satisfy all new migrants coming from other cities rather than rural areas.

The question is: Can the demand for mainstream housing be met by the government-initiated rental housing?

The restriction order is to prevent speculative buyers from entering the market. But it is hard to distinguish speculators from genuine homebuyers when they are buying a house. Though motivations for buying a house either to live in it or as an investment often overlap, it is possible to see them more clearly when properties are put up for sale.

After selling a second house, people could have to pay a capital gain tax, which is based on the difference of the buying and selling amounts. The restriction on buying or selling a second house, however, should not be limited to one city. Of course, it is easier to implement the regulation within the confines of one city. But the restriction on buying a second house should cover the entire country or, to begin with, all the cities.

The regulation is quite a challenge for the government because it would demand a unified national information system for property registration.

And when it comes to encouraging homeowners to put their housing units up for rent, the tax on rental income should be reduced.

Moreover, property tax is now being levied only in Shanghai and Chongqing, but it will soon be extended to other cities. Nevertheless, what the government really needs to do is to treat the cause of the property market bubble rather than its symptoms.

The restriction order is only a temporary measure and, as indicated by some officials, it will be eased when the property market cools down. But it is better to deepen the reform of the fragmented land and housing markets, instead of resorting to temporary quick-fix measures.

The author is a professor at and director of Urban China Research Centre of Cardiff University, United Kingdom.