Introduction
China's most controversial industry is real estate. Improving living conditions requires spacious houses, from the countryside into the city to change the fate of the need for urban houses, resident enterprises and government wallets to become larger can not be separated from the growth of deposits created by real estate-related loans, local governments to support the development of industrial sectors and urban construction can not be separated from land finance, real estate drives the longest industrial chain and tens of millions of jobs, real estate is the industry that determines the most weighty macroeconomic ups and downs. Concerns and doubts about real estate have never stopped. Real estate price bubbles, high housing prices crowding out the development space of the real economic sector, high housing prices squeezing consumption, and high real estate investment rates have been widely circulated, and they have also plagued decision-making departments.
After entering the 21st century, real estate has grown rapidly in the voice of worry and doubt, and has grown resiliently even under the pressure of continuous regulatory policies. Today, however, the real estate industry has encountered unprecedented difficulties. Not only has the real estate giant Evergrande encountered liquidity problems that are difficult to solve, but also many real estates are on the verge of liquidity crisis. Overseas investors make a long list of the next real estate companies that may not be able to pay off their debts. The financing and sales revenue of real estate enterprises is experiencing an unprecedented winter, and real estate companies that lack cash flow do not dare to ask for land in popular cities.
Macroeconomic scholars are increasingly worried about the hard landing of the real estate market, from real estate investment and sales to steel cement to the upstream and downstream industrial chain of furniture and appliances, from real estate credit and housing loans to the growth of credit in the whole society, from real estate land purchases to local government revenues and urban infrastructure. The hard landing of real estate means that real estate enterprises, real estate upstream and downstream enterprises, local government-affiliated enterprises, residents, and several sectors of the financial system are linked together to hurt each other, and the negative impact on the economy is doubled. A hard landing in the real estate market is a hard landing in China's economy, and China cannot afford a hard landing in the real estate market.
To prevent the real estate market from landing hard, the most important thing is to prevent the liquidity crisis of real estate enterprises and preserve the cash flow of enterprises. Specific measures include timely relaxation of the quota limit on residential mortgage policies; support for the borrowing of new debts of real estate enterprises to repay the old; emergency rescue loans for real estate enterprises that have been in good operating condition in the past but suddenly fall into liquidity difficulties, and the loan interest rate does not have to be preferential but the number is sufficient. In addition, it is necessary to boost the growth rate of social financing in the whole society, which is to prevent the downward spread of the real estate market to other industries and departments, and to prevent the negative feedback mechanism that is constantly enlarged. Specific measures include lowering interest rates and increasing public sector debt to support investment in infrastructure. In addition, the introduction of other policies that have a significant impact on the real estate market has been postponed in the near future.
The real estate market needs to be based on long-term policies, and the most important goal of the policy is to make people who are willing to go to the city to change their lives and destinies afford the house in the city, and cannot let the high housing price burden overwhelm the life of a family. The foothold of the policy is to improve the housing supply in the metropolitan area and improve the affordable housing system.
We discuss several issues in the following, one is the role of the real estate industry in China's operation; the second is how to view high housing prices and its impact on other sectors; the third is the new changes in the real estate industry and real estate regulation and control policies in the past five years; the fourth is how to prevent the real estate market from landing hard in the short term, and where are the most important problems that need to be solved in the real estate market in the long run.
China can't afford real estate
Market hard landing
Wen 丨 Zhang Bin Zhu He Zhong Yi
The author Zhang Bin works at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences, and Zhu He and Zhong Yi work at the China Finance Forty Forum. The author thanks Ms. Pan Aimin of Vanke Company and Ms. Qiao Hong of Bank of America Securities for their help in the writing process of this article.
First, real estate first
To discuss the influence on the ups and downs of the national economy, no industry can compare with real estate, real estate first.
1. Pivotal real estate industry
Over the past two decades, the real estate industry has grown by leaps and bounds. The annual sales area of commercial housing increased from 1.7 trillion square meters in 2000 to 17.6 trillion square meters in 2020, with an average annual growth rate of 14.0%. The living conditions in urban and rural areas have been continuously improved, and the per capita housing area of urban residents has increased from 20.3 square meters in 2000 to 39.8 square meters in 2019, and the per capita housing area in rural areas has increased from 24.8 to 48.9 square meters [1].
Behind the sharp increase in real estate consumption area is a huge real estate development investment. Real estate development investment ultimately forms fixed capital as an important part of GDP growth. From 2000 to 2020, real estate development investment increased from 490.17 billion yuan to 14.1 trillion yuan, with an average annual growth rate of 18.9%. According to the method of Xu Xianchun and other scholars, the contribution rate of real estate development investment to economic growth is estimated, and the average proportion of total fixed capital formation formed by real estate development investment to GDP from 2002 to 2020 reached 6.4%, and the average annual contribution rate of real estate development investment to GDP growth was 7.8%. Real estate use will stimulate the development of resident service industry, public utilities and other industries, rent expenditure, housing maintenance management fees, utilities and virtual expenditure of self-owned housing services and other real estate consumption is also an important part of residents' final consumption, Xu Xianchun and other scholars estimate that the results show that real estate consumption to GDP growth in 2009-2011 the average contribution rate is 3.2%, under the GDP caliber of the expenditure method, In 2011, the total fixed capital formation and real estate consumption formed by real estate development investment accounted for 13.7% of GDP, contributing 10.3% to GDP growth.
Real estate has the characteristics of a long industrial chain and many related industries, and has a strong pulling effect on related industries such as construction, industry, transportation, wholesale and retail, finance and insurance. Real estate development will directly consume cement, steel, ceramics, rubber, glass, non-ferrous metals and other building materials, after the sale will drive the development of furniture, home appliances, textiles, decoration materials and other industries, in its development and sales process also promote the development of logistics, finance and many other tertiary services. The contribution rate of real estate industry and real estate-driven related industries to GDP growth in real estate production activities reached 29.4% in 2013.
2. Real estate is the promotion of urbanization by local governments
and the main gripper of industrialization
Looking back at the development of real estate over the past two decades, a basic fact is that the rapid development of real estate has been accompanied by the rapid advancement of urbanization and industrialization. The relationship between real estate and urbanization and industrialization is not a one-way causal relationship, and the development of urbanization and industrialization will further promote the prosperity of real estate, of course, this is inseparable from the flexible supply of land. Real estate is often an important starting point for local governments to promote urbanization and industrialization, through the establishment of a dual land supply system, increase the price of commercial and residential land, and then use the income of commercial and residential land to subsidize industrial land and industrial development. This is a common pattern of local government development over the past two decades, the so-called "land finance".
The "land finance" model originated from the 1994 tax-sharing reform. The reform of the tax-sharing system that began in 1994 significantly concentrated fiscal revenue to the central government, dividing the main taxes such as consumption tax and value-added tax into central exclusive income or the central and local shared income (the proportion of central revenue was significantly more), and the non-main tax of business tax and income tax was divided into local exclusive income. The proportion of central fiscal revenue has increased significantly from 22.0% in 1993 to 45%-55% in 1994-2020. At the same time, the reform of the financial budget system began in 1998, the main content of which was to bring extrabudgetary funds into the budget for management, and to implement the centralized payment system of the national treasury and the two-line management method of revenue and expenditure of extrabudgetary funds.
The reform of the tax-sharing system has not adjusted the expenditure responsibilities of the central and local governments accordingly, and there is a mismatch between the financial power and the power of local governments. Scholars such as Tao Ran, Lu Xi, Su Fubing, and Wang Hui believe that the large-scale restructuring of local state-owned enterprises and township enterprises, which originated in the mid-1990s and was basically completed before the new century, has increased the social security expenditure of local governments by a large margin, and local financial pressure has become prominent. In order to broaden the sources of income, local governments have gradually begun to compete for manufacturing investment through large-scale investment attraction, and at the same time open up new sources of extra-budgetary income based on land transfer and various administrative fees.
In this process, the land transfer situation is significantly differentiated, and the situation of industrial land is obviously different from commercial land and residential land. Industrial land has formed a "national buyer's market" due to inter-regional investment competition, while commercial land and residential land have formed a "local seller's market" due to the monopoly of local governments on the local primary market. On the one hand, in order to attract investment in manufacturing, local governments transfer industrial land at low or even "zero land prices" through less competitive "one-to-one" agreements (local governments need to pay the cost of land acquisition in advance and do a good job in supporting corresponding infrastructure) to transfer industrial land, and return part of the transfer fee according to the investment amount. In this process, a large number of rural land was expropriated, the urbanization process was significantly accelerated, and the continuous development of urban industry also led to the development of local service industries, providing a large number of jobs for the rural labor force that lost land, and the rural labor force began to migrate to the urban manufacturing and service sectors on a large scale. On the other hand, industrialization and urbanization have improved economic efficiency, and the demand for land in the service industry and the increase in per capita income have promoted the continuous rise in housing prices, and local governments can transfer commercial and residential land at high prices through "bidding, auctioning and listing", obtain higher land transfer fees, and continue to invest in local infrastructure construction.
The land mortgage financing model of local governments (local financing platform companies) has become an accelerator of urbanization and industrialization. On the one hand, local governments usually take land collateral to borrow money from banks in land acquisition and industrial park construction. The basic idea of land expropriation is to use the mortgage loan of the previous reserve land for a new round of land acquisition and development, use the income from land transfer to pay off the mortgage loan, and then use the newly expropriated land for a new round of financing, and so on. A typical example is that in 2019, the new special debt was 2.15 trillion yuan, of which a considerable part of the funds were invested in shantytown transformation and land reserves, accounting for 13%. It can be seen that the willingness of local governments to develop land is relatively strong.
On the other hand, local infrastructure construction is mainly completed by local financing platform companies, of which only a small amount of land transfer funds are directly used for infrastructure investment, and most of the funds also come from bank loans based on land mortgages. Only 17.5% of the infrastructure investment in 2019 came from the budget funds, of which the state-owned land transfer related expenditures in the government fund budget were roughly only about 9% of the funds directly formed into infrastructure investment. Zhu He and Sheng Zhongming's research found that more than 80% of infrastructure funding is supported by extra-budgetary funds, with local platform companies leading the funding an estimated to account for more than 60%. According to a provincial audit bureau survey, 90% of the liabilities of the local financing platform come from banks, of which more than 70% of the loans are mortgaged through land, and the debt repayment funds mainly come from land transfer fees, real estate development income and fiscal revenue. In general, the land mortgage model enables local governments to rapidly expand the scale of land acquisition, and the land transfer income obtained is continuously invested in urban development and infrastructure construction, promoting local economic development and rapid urbanization, and can obtain more land transfer fees and fiscal revenues, as well as obtain more funds through higher value land mortgages to banks to continue to be used for urban development.
Real estate and the associated land finance model have contributed to the rapid industrialization and urbanization of local governments over the past two decades. However, land finance has also exacerbated the problems of high housing prices, high debt, and high leverage. At the same time of rapid urbanization and industrialization, with the rapid rise in land prices and housing prices, local government revenues rely more on land sales and the fiscal taxes they bring, and infrastructure capital expenditures rely more on land mortgages. At the same time, high housing prices have also led to rising leverage in the residential sector, and the debt of the residential sector as a share of GDP has increased from 12.4% in 2000 to 62.2% in 2020. Although real estate brings problems such as land finance, the core of its risk to the financial system lies in leverage. For government departments, the scale of infrastructure construction that relies on land finance and land finance to expand rapidly has led to a prominent hidden debt problem of local financing platform companies, and the generalized debt ratio of local governments (explicit + implicit) may have far exceeded the IMF's "90%-150%" safety line, and the local government hidden debt resolution work is still in progress.
3. For a long time, the real estate regulation policy is
An important part of the government's counter-cyclical adjustment policy
The influence of real estate on the operation of the national economy is so great that the government regards the regulation and control of the real estate market as the key to counter-cyclical adjustment, and the administrative restrictions such as real estate credit policies and purchase restrictions and loan restrictions have become an important means of government counter-cyclical adjustment.
When the economy is under downward pressure due to external shocks or insufficient domestic demand, the government often relaxes restrictions on real estate, stimulates housing demand, promotes real estate investment, and stabilizes economic growth. For example, in response to the Asian financial crisis after 1998, the government adopted an expansionary fiscal and monetary policy, and in July of the same year, the State Council issued the Notice on Further Deepening the Reform of the Urban Housing System and Accelerating Housing Construction (Guo Fa [1998] No. 23), which clearly proposed to "promote the housing industry to become a new economic growth point", and the real estate industry entered the marketization stage. Shortly after the end of the SARS epidemic, in August 2003, the State Council issued the Notice on Promoting the Sustained and Healthy Development of the Real Estate Market (Guo Fa [2003] No. 18), which clearly stated that "the real estate industry has become a pillar industry of the national economy", kicking off the prelude to the rapid development of the real estate industry.
After the outbreak of the international financial crisis in 2008, the main economic indicators fell rapidly in the second half of the year, and the year-on-year growth rate of industrial added value above designated size continued to decline from 16.0% in June 2008, turned from positive to negative in January 2009, and then rebounded rapidly to 11.0% in the following month. The year-on-year growth rate of import and export value fell rapidly from 29.9% in July 2008 to -9.2% in November of the same year, and only returned to 9.9% in November 2009. Real estate investment and new construction were significantly dragged down, with the cumulative amount of real estate development investment falling from 33.5% in June 2008 to 24.6% in October, and the cumulative area of new housing starts falling from 27.2% in February 2008 to 2.3% in December of the same year. In response to the risk of recession, the government has relaxed its control of the real estate market, and the stimulus policy has focused on the demand side. In October 2008, the National Standing Committee proposed to "reduce the tax on housing transactions, support residents to buy houses and support residents to buy houses", and the central bank quickly lowered the down payment ratio and housing loan interest rate, and the deed tax was also reduced to 1%. After the "four trillion yuan" stimulus plan was determined in November, commercial banks limited the scale of credit and relaxed the approval of housing loans. Subsequently, it can be observed that real estate development investment and the area of new construction rebounded rapidly year-on-year and returned to pre-crisis levels.
When the economy recovers, or even overheats, usually in order to curb the excessive rise in house prices and maintain healthy economic growth, real estate-related policies begin to be further tightened. On the demand side, credit policies, tax policies and administrative measures are parallel, credit policies include increasing the down payment ratio, residents' personal home loan interest rates, etc., tax policies include increasing deed taxes, etc., and administrative measures include purchase restriction orders in key cities. On the supply side, it is mainly through standardizing the land acquisition behavior of enterprises and restricting loans from real estate development enterprises.
This model has undergone major changes after 2016, and the Chinese government no longer uses real estate regulation as a means of counter-cyclical adjustment, but regards real estate as an object that needs long-term regulation. The 2016 Central Work Conference proposed that "housing is not speculation", which is still the tone of macro-control of the real estate market, and the 2019 Central Political Bureau meeting clearly proposed that "real estate is not used as a means to stimulate the economy in the short term". The most emblematic example of policy shift is that under the impact of the new crown epidemic in early 2020, the economy is facing serious downward pressure, and a large number of cities have introduced relaxation policies for the real estate industry, but mainly from the supply side of the liquidity pressure of housing enterprises, such as deferring the payment of land gold, reducing the proportion of land bidding deposits, and delaying the payment of taxes and fees.
Source: WIND, compiled by the author
Figure 1 The amount of real estate development investment completed and the area of new housing starts are cumulative year-on-year
Even so, real estate has in fact played an important role in dominating China's economic cycle and stabilizing aggregate demand. After 2018, real estate investment and the growth of resident loans behind it are an important force to stabilize the economy, preserving total demand and maintaining the scale of social financing. Real estate development investment has steadily increased from 12.0 trillion yuan in 2018 to 14.1 trillion yuan in 2020, with an average annual growth rate of 8.8%, which has formed an effective support for fixed asset investment. Especially since the impact of the new crown epidemic in 2020, the growth rate of real estate investment has recovered rapidly, and the year-on-year growth rate in January-June 2020 has returned to 1.9% compared with -16.3% at the beginning of the year, which has played an important role in economic recovery in the case of sluggish consumption and slow recovery of manufacturing investment. From 2018 to the second quarter of 2021, the average proportion of new real estate loans (including real estate development loans, new real estate development loans and new personal housing loans) by major financial institutions was 21.3%, becoming an important supporting force for social financing needs.
Figure 2 The proportion of new real estate loans in the scale of new social financing
Second, how to look at high housing prices
Dissatisfaction with real estate comes mainly from high house prices. Full of too many emotions, it is inevitable to misunderstand.
1. High housing prices in metropolitan areas
House prices are an invisible wall of a city. Many people can't afford to live in a corner of a big city center with a lifetime of hard work. Not in China, Beijing, Shanghai, and Shenzhen have high walls, but also in central New York, London, and Tokyo. The difference is that although the walls of the central urban areas of New York, London, and Tokyo are high, the height of the suburban walls has dropped significantly, and ordinary-income families can still afford life in the metropolitan area. The walls of Beijing, Shanghai, and Shenzhen, even in the suburbs, are too high for ordinary-income families to deter, ruining the opportunity for many to enter big cities to change their destiny.
Because of the better human capital development and growth environment and more consumption upgrading options in metropolises, entering metropolises is more conducive to achieving income growth and quality of life upgrades, the competitive advantage of metropolises is more prominent, and the difference between housing prices in metropolises and small cities is further enlarged. Taking Beijing as an example, in the period from 2000 to 2012, the average residential price of commercial housing in Beijing rose from 2 times to 3 times relative to the national average in more than a decade, and rose to 4.4 times in the five years from 2013 to 2018. Considering that most of the new housing in Beijing is in the suburbs, the actual increase in housing prices in Beijing relative to the whole country does not stop there. The faster rise in house prices in Shanghai and Shenzhen compared with the national house prices is not much less than that in Beijing.
High housing prices in China's metropolises have nearly cut off the hopes of the vast majority of new entrants to buy a house on their own income, and the burden on the entire population that has already chosen a home mortgage has been overburdened. The house-to-income ratio in China's first-tier cities has approached 25 times, and the second- and third-tier cities have remained nearly 10 times. The top five cities in terms of house price-to-income ratio in 2018 were Shenzhen (34.2), Shanghai (25.2), Sanya (23.2), Beijing (22.8) and Xiamen (19.9). Such a high house price-to-income ratio means that the walls of these cities keep most of the new entrants out. People who live in the city are also uncomfortable. Scholars such as Hanming Fang of the University of Pennsylvania have explored the economic pressure brought by high housing prices to home buyers based on the residential mortgage loan data of 120 cities of a large commercial bank. They compared and analyzed two types of home buyers in various types of cities: one is the low-income group whose household income accounts for less than 10% of the loan buyers, and the other is the middle-income group whose household income accounts for 45-55% of the loan buyers. Their study found that in first-tier cities, the low-income group in the loan group has a house price-to-income ratio of more than 10 times, and housing expenditure has become a very large burden; even for the middle-income group in the loan group, the house price-to-income ratio in first-tier cities is more than 8 times, and housing expenses are overwhelmed.
2. The reasonable and unreasonable ingredients behind high house prices
There are reasonable and irrational elements behind the rise in house prices. Behind the continuous sharp rise in house prices is the combined power of supply and demand. There are both reasonable and irrational components in the two forces of demand and supply, and the rise in house prices therefore contains both reasonable and unreasonable components. Some of the irrational elements behind the rise in house prices come from the lagging development of the market, and some from policy distortions.
The unreasonable components of the supply side include the following aspects.
First, the supply of housing in large cities is inelastic. Given income growth and demand growth to buy a house, the elasticity of housing supply means that the rise in house prices will bring about a significant improvement in housing supply, which will bring about population inflows and urban expansion, and the growth rate of house prices will be relatively moderate because of the improvement of housing supply; cities that lack supply elasticity will be difficult to bring about an increase in the number of housing, population inflows and urban expansion will be blocked, and income increases will bring more about the rise in house prices and the cost of living. Grayser, a professor of urban problems at Harvard University, drew the above conclusion based on American research, and this conclusion is also applicable in China. The supply of residential land in China's metropolises is extremely tight. Divide the average new residential land area from 2009-2018 by the resident population to reflect the intensity of new residential land supply in the city. The intensity of residential land supply in major cities such as north, upper and deeper cities is the lowest, and the per capita new residential land supply area is less than 10 square meters. The intensity of new residential land supply in second-tier cities varies greatly, from Fuzhou and Xining, where the per capita new residential land supply area is less than 10 square meters, to Wuhan, Shenyang and Urumqi, which are close to 30 square meters. The intensity of new residential land supply in third-tier cities also varies significantly, ranging from less than 5 square meters to more than 30 square meters. Overall, the elasticity of housing supply in second- and third-tier cities is significantly higher than that in large cities.
Second, infrastructure and public services constrain the improvement of housing supply in large cities. The purchase of housing is also the purchase of various services such as transportation, education, medical care, and commercial facilities brought about by the location of the housing. The focus of housing supply is not on the housing itself, but on the various services and transport infrastructure to which housing is attached. By improving the infrastructure and public services in the metropolitan area, the supply of high-quality housing can be increased, which is the main means to alleviate the pressure on housing prices in central cities. The development of metropolitan areas such as New York and Tokyo has relied on the vigorous development of suburban public services and public infrastructure, narrowing the traffic time and convenience to the central urban area, and then realizing the replacement of suburban housing for central urban housing. This not only allows the metropolitan area to accommodate more people, but also reduces the cost of housing and living in the metropolis. China has also proposed the construction of metropolitan areas, and has done a lot of work in terms of transportation infrastructure around megacities. However, compared with developed countries, there is still a big gap in the perfection of both infrastructure and public services, which restricts the replacement of housing in central urban areas in suburban areas and becomes an important constraint to lower housing prices in large cities.
Third, the supply of affordable housing is disconnected from population mobility. The distribution of affordable housing is clearly different from the distribution of newly built commercial housing and the distribution of population flows. Driven by market competition forces, new commercial housing is basically closely followed by population flows, and more houses are built in areas of population inflow. According to the construction of affordable housing in 2010-2011, which can obtain data, affordable housing is concentrated in Xinjiang, Heilongjiang, Anhui, Jiangsu, Zhejiang and other provinces; the construction of affordable housing in the central and southern regions, especially in the Pearl River Delta region, where a large number of people flow in, is very low. Affordable housing cannot follow the flow of population, especially the supply of affordable housing in metropolitan cities where the population hopes to flow is lagging behind, and it has not been able to curb the rise in house prices or alleviate the excessive burden of rising house prices on low-income groups.
Fourth, the loan policy of real estate developers has not been adjusted with the times. In anticipation of the continuous rise in house prices, hoarding and waiting for appreciation has become an important source of profit for some developers. In order to curb land speculation and land hoarding and prevent market risks in land development, the regulatory authorities have adopted strict regulations on loans to real estate developers and restricted various forms of financing for real estate developers. In recent years, the market's expectations for the rise in real estate prices have cooled significantly, developers rely on hoarding land and hoarding houses to make a profit, and developers' business strategies have shifted to a high turnover model of rapid development and rapid sale of houses. In the new environment, excessive restrictions on lending to developers have in fact curbed residential supply and pushed up house prices. Our regression model of housing prices in sub-cities shows that development loans to developers are significantly negatively correlated with housing prices, and the decline in development loans directly leads to a decline in the supply of new housing, exacerbating the rise in house prices.
There are also unreasonable elements on the demand side to stimulate supporting high house prices.
First, the debt-led financial system has fueled demand for real estate investment and exacerbated rising housing prices. The debt-led financial system increases the investment attributes of real estate. An important element underpinning a debt-led financial system is collateral, while real estate is a natural collateral. Grace, a professor of urban issues at Harvard University, pointed out that in debt-led economies, financial institutions represented by banks generally use real estate as collateral, which has increased the investment preference of the whole society for real estate. China is a typical debt-led financial system, and financial institutions also widely use land and real estate as collateral, which has greatly enhanced the investment attributes of real estate and increased the demand for real estate.
Second, pension and insurance financial services lag behind, and real estate has become an alternative financial investment tool for family pension and insurance. From the perspective of international experience, as the level of financial assets in the residential sector increases, the allocation of assets will also change, and China is no exception. The fast-growing financial assets of The Chinese household sector are no longer satisfied with holding only low-risk/low-yield bank deposits. At higher levels of financial assets, the willingness of the resident sector to hold financial investment products with higher risk/high return portfolios has increased, and the willingness to hold long-term financial investment products with pension and insurance functions has increased. These financial service needs are not well met, especially the lack of financial investment tools for pension insurance, which forces the demand for financial assets in the residential sector to shift to real estate investment. Real estate becomes an alternative investment vehicle for financial assets as high-risk/high-yield financial investment products, or for pension and insurance financial investment products. According to the "China Household Financial Asset Allocation Risk Report" of Southwest University of Finance, real estate accounts for more than 60% of China's household assets. In contrast, U.S. household real estate accounts for only half of all household assets in China.
Behind the high housing prices in China's metropolises, there are reasonable elements and many irrational elements. The irrational component behind the high housing prices is not the most popular monetary over-issuance explanation, but the harder stones of the land system, public management and services, and the development of the financial system. This has made the walls of high housing prices in metropolises higher and harder, ruining a large number of opportunities to change the fate of life, and also eroding the vitality of the big cities themselves.
3. High house prices do not equal a house price bubble
It is true that property prices in China's big cities are high. But does high housing prices mean that there is a bubble in house prices, and the bubble will soon burst? High house prices do not equal the house price bubble, and the pain caused by high house prices may not burst as quickly as the bubble, and may continue for a long time.
The house price-to-income ratio reflects the house price pain index, and the higher the ratio, the greater the pressure on home purchases, but this indicator is not suitable for predicting house price bubbles. Many large cities with high house price-to-income ratios do not necessarily have higher housing bubbles than smaller cities with low house price-to-income ratios. The residents' disposable income minus the residents' consumption expenditure is used as the residents' savings, and the residents' savings are divided by the interest on the residents' debts, so as to obtain the interest protection multiple of the residents' department.
Based on a large number of international experience, Vanke's Tan Huajie research shows that the interest guarantee multiple of the residential sector reflects the ability of residents to repay their housing mortgages, and is the most effective indicator of predicting whether house prices will fall sharply, and the forecasting ability is far better than that of many other indicators such as the ratio of house price to income, the leverage ratio of debt in the residential sector and so on. Their study found that when the interest coverage multiple of the resident sector is higher than 1.5 times, there is basically no country that has experienced a sharp decline in house prices. On the eve of the sharp decline in house prices in the United States in 2007, the interest protection multiple of the resident sector was 1.46 times; in Japan 1989, it was 1.49 times in Hong Kong in 1997; Finland was 0.73 times in 1989 and 1.55 times in 2007; and Spain was only 0.99 times in 1989 in the same period. The international experience of this indicator below the threshold of 1.5 will lead to a sharp fall in house prices and a debt dilemma in the residential sector. China's current disposable income in the household sector is about 61 trillion yuan, consumption is about 38 trillion yuan, and savings are close to 23 trillion yuan; various loans in the household sector are 55 trillion yuan, and the interest that needs to be paid according to the weighted average loan interest rate of 5.5% is about 3 trillion yuan, and the interest protection multiple is about 8. Well above the international cordon level. This shows that the ability of Chinese residents to repay residential mortgages has a high guarantee, at least from the perspective of international experience, real estate prices have fallen sharply in the short term and caused systemic financial risks are very low.
4. Whether the price "sucks blood" or "the key to hematopoiesis lies in the elasticity of supply."
In the process of rising house prices, business operations face higher factor costs, not only higher rents, but also higher wages. There is a widespread concern that the rising costs brought about by rising house prices will erode the profits of enterprises, especially manufacturing, worsen the living environment of manufacturing, and even become the main reason for the bankruptcy of many enterprises.
Whether it is short-term data or long-term data, the growth rate of house prices and the growth of corporate profits show a positive correlation. This correlation alone cannot draw any strong conclusions, and it cannot be assumed that rising house prices are conducive to increasing business operations, but at least it reminds us that the relationship between rising house prices and business operations may not be as simple as raising costs. The impact of rising house prices on business operations should at least take into account the following two aspects of the mechanism.
Rising house prices have increased the cost of factors in the operations of enterprises, but the impact on the operations of different types of enterprises has been significantly different. For enterprises with strong market pricing power, the result of rising rents or labor costs is often the price of products or services, and the impact of rising house prices on corporate profitability is limited. For enterprises with weak market pricing power, enterprises have at least the following three ways to deal with it.
The first is to change the intensity of factor input of products/services, such as replacing existing technologies with land-saving technologies, a typical example of which is the more popular express delivery industry in high-price areas, that is, saving land in urban centers; and for example, the transformation of shopping malls in central urban areas into large shopping malls in the suburbs. The second is to increase research and development efforts, and use the cost decline in other aspects to offset the rise in costs caused by rising house prices. The third is to withdraw from the local market, and enterprises that withdraw from the local market also face two choices, transfer to other regions to continue to operate, transfer to other departments to continue to operate, or completely withdraw after the resources are idle. Only in the last case, when resources are idle, will there be a real loss of output.
Rising house prices can put general pressure on business operations and force companies to make adjustments, but after considering the response measures of enterprises, rising house prices will only bring real output losses in very specific circumstances. The size of resource idleness and output loss depends on factor market liquidity, and if unemployment from the shock of rising house prices can quickly find jobs elsewhere, the losses are smaller and vice versa.
Rising house prices have spurred an upswing supply of real estate, with the resulting infrastructure improvements, urban sprawl and economies of scale. This is also a common phenomenon that we have seen in China's urbanization process in the past few decades. Economies of scale can improve the productivity of enterprises from multiple angles such as reducing costs, increasing specialization and productivity levels, and improve the living environment of enterprises. One piece of evidence for this is that as population density continues to increase, so does the number of businesses. When the population density of 0-2500 people per square kilometer, the number of enterprises is between 0-87; the number of regional enterprises with a population density of 2500-5000 people is between 88-238; the number of regional enterprises with a population density of more than 5000 people reaches 340. The more densely populated the area, the more attractive it is to businesses.
On the one hand, the rise in housing prices has brought a negative impact on the rising operating costs of enterprises, and on the other hand, it has also brought development opportunities from economies of scale to enterprises. From a comprehensive perspective, the impact of housing prices on business operations depends on the elasticity of real estate supply. The supply elasticity is too low, the house price rises but the housing supply does not increase, it is difficult to bring urban expansion and economy of scale benefits, the negative impact of the rise in house prices is more prominent; maintain the appropriate supply elasticity, the rise in house prices is accompanied by a significant increase in housing supply, not only the next rise in house prices has been contained, the urbanization process has also been significantly promoted, creating more development opportunities for enterprises, and the positive impact is more prominent. In the regression analysis, we can see that house prices and corporate profits show a negative correlation, and the elasticity of housing supply is a significant positive correlation.
Rising house prices have increased the burden on home-buying and renting households. Especially for low- and middle-income groups, housing spending is too high relative to income. A common concern is that high house prices crowd out other aspects of purchasing power. This phenomenon exists in many households, but in the aggregate sense, whether high house prices have squeezed out consumption requires further study.
The rise in house prices has changed the relative prices of various expenditures in the lives of residents, and the impact on the consumption expenditure of different households has been significantly different. The household sector is faced with the choice of housing expenditure or other consumer expenditure. Housing as a necessity in life, in different families face significant differences in demand substitution elasticity, families already have a stable place of residence needs substitution elasticity is relatively high, and families without stable place of residence lack of demand substitution elasticity. For households that lack the flexibility of demand substitution, rising house prices will force households to increase housing-related spending, thereby squeezing other consumption. The degree of crowding out of other consumption depends on the elasticity of housing supply in the city, and the increase in housing prices under the higher housing supply elasticity has led to a significant improvement in housing supply, and the growth of housing expenditure is limited, and the crowding out of other consumption is also limited; under the lower housing supply elasticity, housing expenditure growth is greater, and the crowding out of other consumption is also more significant.
In addition to the crowding out effect of rising house prices on consumption, we should also consider the improvement of real estate supply, the increase in the level of urbanization rate and the resulting increase in scale effect and income level in the process of house price rise, which will have a positive impact on consumption. Considering two factors, the relationship between rising house prices and consumption is blurred. Using the ten-year average data that spans the cycle, there is a weak positive correlation between house price growth and consumption growth.
Third, the new model of the industry and the new policy of regulation and control
Under the fierce market competition, real estate enterprises have their own capabilities, and regulatory policies are mainly aimed at real estate enterprises and home buyers.
1. The real estate industry has entered the "high turnover mode"
The opening up of the real estate industry to the private sector, coupled with the long-term strong market demand, has a large number of practitioners in the real estate industry and fierce competition. In the fierce competition of real estate practitioners, the good side is the overall rapid development of the real estate market, and the overall quantity and quality of housing supply have been significantly improved; the problematic side is the aggressive expansion of some enterprises, the use of funds is not standardized, and so on. In 2016, the rules of the game in the real estate industry have changed significantly, and a new era characterized by a "high turnover model" has been fully entered. The "high turnover model" refers to the fact that real estate developers can quickly obtain pre-sale qualifications by speeding up the start of construction in the early stage, and then use the advance payment provided by home buyers to support the next stage of land purchase expenditure and new construction. The high turnover model can be traced back to 2010, vanke and other housing enterprises took the lead in using the high turnover model to create unprecedented sales, this year is also known as the "first year" of high performance and high turnover. The "high turnover model" did not immediately catch on in the industry. Until 2016, the real estate industry reopened the "high turnover model", and Country Garden played this model to the extreme. Subsequently, all kinds of real estate enterprises nationwide gradually accepted this real estate business model. At this point, speed has officially become the key to the competition between housing enterprises - the speed of land acquisition, the speed of new construction to the speed of obtaining pre-sale certificates, and the speed of selling houses to collect money.
Once the high turnover model is turned on, the most important task of real estate enterprises becomes two points. The first is to ensure that there are enough land reserves to undertake newly started real estate projects. The enthusiasm for land acquisition in real estate is unprecedentedly high, and the proportion of land purchase expenditure in total real estate investment has increased significantly. Especially after 2018, the proportion of land purchase costs in real estate investment has risen rapidly from the level of about 15% in the past to more than 30%. At the same time, the income of land transfer fees of local governments has also reached a new high year by year, which has alleviated the pressure of the decline in financial resources at the grass-roots level to a certain extent.
The second is to ensure that the cash flow obtained through the pre-sale is sufficiently stable. This requires real estate companies to continue to exert efforts at the sales end, resulting in the emergence of various sales means such as hunger marketing, bundled sales, and pre-order discounts in recent years. As a direct consequence, the residential sector is playing an increasingly important role in the funding of real estate development investments.
The share of personal deposits and mortgage loans as a source of real estate funding stabilized at around 38% in 2011-2015 and has since increased rapidly and is now close to the 50% level. In other words, half of the sources of funding for real estate development investments come from the residential sector. Because of this, the various regulatory rules that restricted banks from directly providing development loans to real estate companies in the past have become increasingly ineffective, because real estate companies have in fact obtained bank financing "indirectly" by applying for mortgage loans from banks through the resident sector. If necessary, real estate enterprises can also obtain financing support from outside the banking system through trust, private placement, bond issuance, etc. After the vigorous implementation of the financial deleveraging policy in 2017, the difficulty of real estate enterprises to obtain financing through off-balance sheet is increasing, and the cost is also rising, which further highlights the importance of the residential sector to real estate financing.
Source: WIND
Figure 3 The real estate sector is increasingly dependent on the residential sector for its sources of funding
2. "Homeowners don't speculate" new tone
Around the same time, the central government's real estate regulation and control policy underwent major adjustments. As mentioned earlier, in the past few rounds of real estate regulation and control policies, more emphasis is placed on the counter-cyclical nature of real estate, sixteen words to summarize is: "good is tight, poor is loose, control demand, less talk about supply." At the Central Economic Work Conference at the end of 2016, the central government for the first time put forward the regulatory tone of "houses are used to live, not to speculate", which marked a significant change in the central government's positioning of real estate.
The new real estate regulation and control ideas have three core contents: "housing is not speculation", the establishment of a long-term mechanism for real estate regulation and control, and the implementation of policies according to the city. Since then, real estate-related departments have successively introduced supporting policies, involving housing enterprise financing, home buyer credit and other aspects. "Housing is not speculation" means to reduce the financial attributes of real estate, resolutely curb the rise in house prices, and strictly control the risk of real estate market has become the most important goal of real estate market regulation. "Housing is not speculation" weakens the counter-cyclical adjustment function of real estate. After the epidemic in 2020, the central government clearly proposed that "real estate should not be used as a means to stimulate the economy in the short term", which further demonstrated the continuity and resoluteness of the central government's regulation and control of the real estate market.
The establishment of a long-term mechanism for real estate regulation and control includes many aspects, including but not limited to the long-term mechanism to curb the rise in housing prices, the housing security policy for low- and middle-income groups, and the reform of the residential land supply system. Relevant policies include the introduction of real estate taxes, the increase in the construction of public rental housing, the pilot of co-ownership housing, and the vigorous development of the real estate rental market. These measures are long-term and require the cooperation of numerous policies.
Because the city policy emphasizes that the real estate supply and demand pressure faced by different cities is obviously different, it is necessary to avoid one-size-fits-all control measures. The idea of implementing policies in the city is a major progress in the idea of real estate regulation. In the process of actual implementation, the focus of real estate regulation and control is concentrated in first-tier cities, and the policy orientation of the central government and large cities is only tight, and there is a trend of getting tighter and tighter. Compared with first-tier cities, the implementation of second- and third-tier cities and below is not so strong, with occasional iterations in the past few years, and the actual implementation intensity between cities varies greatly. Because the city's policies have given local governments at all levels a lot of autonomy, they have also provided the necessary conditions for the "sustained prosperity" of real estate in 2018-2019.
In the first half of 2017, in order to implement the principle of "housing and not speculation", almost all cities in the country have introduced relevant policies, and the four cities of Beijing, Shanghai, Guangzhou, and Shenzhen even took the lead in introducing various purchase restrictions and loan restriction policies in the second half of 2016. At the same time, the central bank also began to raise mortgage interest rates. After 2018, the real estate policies of cities across the country began to diverge, and the regulation and control of first-tier cities has not decreased, and there is a tendency to gradually increase. For example, in September 2018, Beijing launched a provident fund loan policy of "buying a house and buying a loan", and the four major banks in Guangzhou raised the upper limit of the mortgage interest rate for the first home in guangzhou. Some cities have not introduced new regulatory policies until 2021. There are also some second- and third-tier cities where the real estate control policy has actually been relaxed. For example, in August 2018, Hefei relaxed the restrictions on the social security payment period for talents to settle down and buy a house, and in February 2019, it relaxed the identification standard for the first home loan; Nanjing also lowered the social security payment period required for the purchase of a house in February 2019. This continued until the end of 2020.
3. Three red lines and two red lines
The outbreak of COVID-19 in early 2020 has had a huge impact on China and the global economy. Thanks to effective epidemic prevention measures, China has taken the lead in restoring normal economic and social order and achieving sustained economic recovery. In this round of economic recovery, real estate investment has played an important role, providing important support for stabilizing local fiscal revenue and macroeconomics. In 2020, housing prices in first-tier cities such as Shenzhen and Shanghai are facing a new round of upward pressure. Real estate still continues the previous "high turnover model", the continuous real estate boom corresponds to the residential sector to increase the speed of leverage has become faster, and the problem of illegal loans in individual areas is prominent. The leverage ratio of residents increased from 56.1% at the end of 2019 to 62.2% at the end of 2020, an increase of 6.1% in one year. Concerns about rising property prices and rising leverage ratios for residents have escalated again.
In this context, real estate regulation and control has been upgraded again, mainly reflected in three points. First, in August 2020, the "three red lines" regulatory rules for real estate enterprises were introduced. Second, at the end of December 2020, the "two red lines" regulatory rules for bank housing-related loans were introduced. Third, since the middle and second half of 2020, cities across the country have once again marched in unison, and no city has introduced a policy of relaxing housing purchases. The purchase restriction policies of first-tier cities and major second-tier cities have been increased again, and some cities have also adopted direct control measures for housing prices themselves, such as announcing the transaction reference price of second-hand houses. Among them, the "three red lines" for real estate enterprises and the "two red lines" for banks have a huge impact.
The "three red lines" force real estate companies to fully enter the stage of active deleveraging.
In August 2020, when the Ministry of Housing and Urban-Rural Development and the central bank convened a meeting of housing enterprises, they put forward three regulatory requirements directly linked to financial indicators - the asset-liability ratio excluding advance receipts should not be greater than 70%, the net debt ratio should not be greater than 100%, and the cash short-term debt ratio should not be less than 1 times. This is the so-called "three red lines" of real estate supervision, which will only be piloted in 12 key housing enterprises in 2020 and implemented throughout the industry from January 1, 2021. The "three red lines" are significantly different from the previous regulatory rules, as they are directly linked to the liability supervision of real estate enterprises. The regulatory authorities divide the housing enterprises into four grades of "red, orange, yellow and green" management, and the enterprises that do not meet the three rules are classified as red files, and the interest-bearing liabilities in the current year shall not be increased. For each condition that is met, a grade will be added, and the upper limit of the growth rate of the scale of interest-bearing liabilities will increase by 5%, but even for housing enterprises in the green file position, the annual increase in interest-bearing liabilities will not exceed 15%.
After the introduction of the "three red lines", the entire real estate industry, including 12 key real estate enterprises, has successively entered the active leverage reduction mode. According to the calculation data of the Kerry Research Center, by the end of 2020, 41 of the 99 sample housing enterprises were successfully downgraded, of which 24 successfully returned to the green file. Among the downgraded housing enterprises, there are 35 downgrades, 5 downgrades two gears, and one company has dropped three gears in a row, directly from red file enterprises to green file enterprises. In addition, among the housing enterprises that stepped on the line in 2020, some have provided a downgrade timetable, and most of them plan to strive for all the "three red lines" in the next 3 years.
The principle of "two red lines" has comprehensively tightened the financing sources of real estate enterprises.
On December 31, 2020, Chinese Minmin Bank and the China Banking and Insurance Regulatory Commission issued the Notice on Establishing a Management System for the Concentration of Real Estate Loans of Banking Financial Institutions, which divides banking financial institutions into 5 grades, and sets the upper limit on the proportion of real estate loans and the upper limit on the proportion of personal housing loans for each bank. The new regulatory principles include personal housing loans in the regulatory caliber of housing-related loans, which is significantly different from the previous emphasis on restricting development loans. At this point, banks have also been forced to start depressing the flow of new loans to real estate. According to the data disclosed by listed banks, as of June 2021, the proportion of personal housing loans and real estate loans in most banks has decreased compared with the end of last year, but there are still some banks whose indicators are still higher than the regulatory "red line", some banks in large banks exceed the red line, and more small and medium-sized banks are facing the pressure of continuous compression of housing-related loans.
As mentioned earlier, the "high turnover model" of the real estate industry over the past five years has become a huge reliance on resident loans. In this context, the regulatory requirements of the "two red lines" have stuck the lifeblood of real estate financing sources, and more than 50% of development funds have been clearly restricted. Coupled with the blow of financial deleveraging on off-balance sheet financing in the real estate industry since 2017, after entering 2021, especially in the second half of 2021, the financing difficulties of real estate enterprises have increased suddenly.
Fourth, prevent the real estate market from landing hard
Real estate has a significant cyclical character, and after experiencing the industry boom in the previous two years, the next cooling is also natural. Superimposed on the huge pressure brought by the three red lines and two red lines on the source of funds of real estate enterprises and the impact of the epidemic, the real estate industry is facing unprecedented pressure after entering the second half of 2021, and the risk of hard landing has emerged.
1. Signs of a hard landing
The real estate market has shown signs of a hard landing.
The real estate market has shown very clear weakness since July 2021, with key indicators such as investment, new starts and sales deteriorating rapidly. In September, real estate investment grew at -3.5% in the month, the first time since 2016 that it turned negative in a regular time (except for February 2020). The year-on-year growth rate of the new real estate construction area was negative for 6 consecutive months, the year-on-year growth rate of the real estate sales area was negative for 3 consecutive months, and the year-on-year decline of the two indicators in the month of September exceeded 13%.
The sharp decline in real estate sales is mainly due to two reasons. First, under the constraint of "two red lines", residents lack financing support for buying houses. From June to August 2021, the cumulative decrease of new medium- and long-term loans to residents was 450 billion yuan less than that of the same period last year, which is the largest continuous contraction since 2018, and there is no sign of stopping. Home mortgage rates have also risen. In September 2021, the average interest rate of the first home loan nationwide was 5.46%, up 23 basis points from the end of last year; the average interest rate of the second home loan was 5.83%, up 29 basis points from the end of last year. Second, affected by the Evergrande incident, consumers are worried that other real estate companies will also have similar outbreaks of Evergrande events, worried about the discount of house prices, and worried about not being able to deliver the house on schedule.
The liquidity of real estate enterprises is extremely tight. Under the high turnover model, real estate enterprises are highly dependent on sales collection, and the sudden decline in sales has brought huge cash flow pressure to real estate enterprises. Under the influence of the Evergrande incident, domestic financial institutions have become more cautious about lending to real estate enterprises. Financing in overseas markets for real estate companies has encountered greater problems. Chinese real estate companies have suffered a panic sell-off in the overseas dollar bond market. Not only did Evergrande's bond prices plummet, but the prices of overseas bonds of most Chinese real estate companies fell sharply after the National Day. Panic has formed in overseas markets, there is no distinction between high-quality and inferior real estate companies, as long as there are bonds that are about to mature, no matter what statements the company makes, the market is worried that it may be difficult to repay the debt. Overseas research institutions believe that many real estate companies have lost the ability to save themselves, a small amount of repurchased bonds has no effect on the market, and a large number of repurchases have no cash support. The cash of real estate companies is mainly in projects and subsidiaries, and in the case of normal refinancing channels, the parent company generally does not have a large amount of cash. However, the bond market is deteriorating at an unprecedented rate, cash cannot be transferred to the parent company quickly, and the liquidity crisis still occurs.
2. Negative feedback mechanism
A hard landing in real estate will lead to a more-than-expected pullback in aggregate demand. The impact of real estate on aggregate demand is divided into direct and indirect effects. The direct effect is that the decline in real estate investment will drive the investment decline, which in turn will inhibit aggregate demand. Real estate investment accounts for about one-third of social fixed asset investment, rough estimates, if real estate investment from the past four years of 10% year-on-year growth rate fell to -5%, it will directly reduce the investment growth rate of 5 percentage points, and then affect the GDP growth rate of nearly 1 percentage point. What is more worthy of attention is the indirect impact of the recession of the real estate industry on the upstream and downstream industries and local government fiscal revenues. Based on the estimates of Xu Xianchun and others (2015), it can be roughly understood that if real estate investment and sales fall by 15% from the high level, it will at least pull down the GDP growth rate by 1.5 percentage points.
The above estimate may still be too optimistic. If there is no timely and effective disposal measures, the reality will be a continuously amplified negative feedback mechanism. Real estate enterprises, real estate upstream and downstream enterprises, local government-affiliated enterprises, residents, and several sectors of the financial system are linked and interact together, and the negative impact on the economy is doubled and magnified.
Real estate industry experts who closely follow the real estate industry believe that if the substantial negative growth of real estate sales revenue cannot be stopped in time, 30% or even more real estate enterprises will not be able to sustain themselves, defaulting on the accounts of upstream and downstream enterprises, failing to repay debts in time, and even failing to repay loans will become more and more intense. Land acquisition and new construction are a matter of later.
Figure 4 Negative feedback mechanism for real estate hard landings
Local government land sales revenue fell faster than expected. Even residential land in first-tier popular cities has begun to go unpopular, and the second round of centralized land supply equivalent flow rate (the proportion of land plots that are auctioned and terminated early) in 11 cities such as Fuzhou, Qingdao, Jinan and Chengdu is as high as 31%. In August, the premium rate of land transactions fell sharply, and the proportion of land traded at the reserve price has exceeded 50%, and a large number of land has been directly auctioned. The decline in local government land sales revenue is bound to affect the infrastructure and other investment activities of local governments, and related credit will also be affected.
Confidence in the financial market has been impacted and credit risk has been raised, and credit expansion in the whole society has been blocked. The risk of default on real estate corporate bonds has spread within and between industries. On the domestic side, the difficulty of corporate bond issuance has increased significantly compared with before, and the interest rate of issuance has also increased significantly, which will inhibit many conventional and reasonable financing needs. The scale of corporate bond issuance in September was only 140 billion yuan, about 300 billion yuan less than in August. Corporate bond issuance rates have also risen significantly, with AA and AA-rated corporate bond issuance rates averaging 5.4% in September compared to 5% in August, an increase of 40 basis points. The Chinese offshore dollar bond market has also been affected. The high-yield dollar bond market has now hit its lowest level ever, and financial institutions have aggressively reduced their holdings in other Chinese assets – including investment-grade bonds, state-owned bond bonds and stocks – due to a lack of liquidity.
The obstruction of the credit expansion of the whole society brings about a decline in the purchasing power of the whole society, a decline in the purchasing power of the residential sector, and then considering the decline in house prices in this process, the willingness of the residents to buy housing will also decline, and the decline in real estate sales will be further aggravated. This creates a negative feedback mechanism that is constantly amplified. In this negative feedback mechanism, not limited to a large number of enterprises in the real estate industry bankruptcy, economic growth decline, social financing decline, housing prices decline, resident income and corporate profits decline, rising risk premiums and enterprises that cannot repay debts.
3. The focus of the short-term response is to avoid real estate
Corporate liquidity crisis
Normal real estate cycle adjustments and the resulting cyclical fluctuations in the economy do not require government intervention. However, this is not a normal situation, and the real estate market is difficult to save itself without timely adjustment of policies, and the resulting macroeconomic shock is also unbearable.
The first is to avoid a liquidity crisis in real estate enterprises. The key to preventing a liquidity crisis is to ensure the cash flow of enterprises, the cash flow of real estate enterprises mainly comes from sales revenue, and the real estate mortgage policy has a significant impact on real estate sales revenue. The first is to relax the limit on the amount of housing mortgage policy in a timely manner, adhere to the principle of "implementing policies according to the city", and meet the housing mortgage needs of residents more according to commercial principles, so that real estate can restore its self-hematopoietic function. The second is to support the borrowing of new debts to real estate enterprises to repay the old. The third is the emergency rescue loan for real estate companies that have been doing well in the past but have suddenly fallen into liquidity difficulties, and the interest rate of the loan does not have to be preferential, but the number is enough to help the enterprise cope with the crisis.
Second, it is necessary to boost the growth rate of social integration in the whole society. In order to prevent the downward transmission of the real estate market to other industries and sectors, to prevent the ever-expanding negative feedback mechanism, and also to boost the vitality of the current overall economy, it is necessary to enrich the cash flow of other industries and sectors. The main measures include 1, lower interest rates, which on the one hand reduce the cost of debt expenditure for enterprises and residents, on the other hand, help to improve the valuation of the assets they hold, strengthen the balance sheets of enterprises and residents and the ability to cope with negative shocks. 2. Increase public sector debt to support infrastructure construction investment. The advantage of this is on the one hand to make up for the drag on infrastructure investment caused by the decline in local government land revenues; on the other hand, it is also a rare opportunity to get rid of excessive dependence on land finance.
The third is to postpone the introduction of other policies that have a great impact on the real estate market in the near future. There is widespread concern that the real estate tax will be introduced in the near future, which will once again have a serious negative impact on real estate sales in the near future. Real estate taxes are a long-term solution that needs to be done and should be done, but a more reasonable time needs to be found.
4. The foothold of the long-term solution is to improve the metropolitan area
Housing supply and improvement of the affordable housing system
There are many difficulties in the real estate market, and there are many misunderstandings. The most important problem to be solved is to make people who are willing to go to the city to change their lives and destinies afford the house in the city, and cannot let the burden of high housing prices overwhelm the life of a family. Metropolises are places with more jobs, higher incomes, and more attractive education for their children, but high housing prices keep the walls of metropolises higher and higher. From the perspective of international experience, the way out is not to control the housing prices in the central urban areas, but to improve the affordable housing system and make a metropolitan area, so that the housing prices in the metropolitan area can be accepted by the vast majority of families.
Improving the affordable housing system and making a metropolitan area involve many major policy adjustments, which may not be suitable for all cities. In the process of implementation, it is necessary to implement policies in accordance with the city, and leave enough room for local independent decision-making in land use, construction project financing, public infrastructure construction, and public services under the premise of establishing the general direction of reform. These reforms not only solve the housing problem, but also change the lives and destinies of hundreds of millions of people, and bring new opportunities for China to explore new economic growth potential.
◾ References
Ning Jizhe. Decisive progress has been made in building a moderately prosperous society in an all-round way, and it is necessary to speed up the completion of shortcomings in the decisive battle to achieve the goal[N]. People's Daily, 2020-07-24(011).
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About the Author
Zhang Bin
Deputy Director of the Institute of World Economics and Politics, Chinese Academy of Social Sciences, Senior Researcher of China Finance Forty Forum.
His research interests include China's economic restructuring, China's macroeconomic and financial market fluctuations, RMB exchange rate and foreign exchange management policies, and global macroeconomics. He has won the Pushan Excellent Paper Award, enjoyed the special government allowance of the State Council, and was selected into the National Million Talents Project.
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