Ling Huawei: government must show flexibility to get real estate market back on track
With the aim of establishing a long-term real estate regulatory mechanism, the People’s Bank of China (PBOC) has proactively promoted a prudential management mechanism for real estate finance.
In August 2020, the central bank and the Ministry of Housing jointly published the “three red lines” policy for 30 large real estate developers. Then, in December 2020, the PBOC and the banking regulator put on caps on the share of outstanding mortgage loans and developer loans in total loans, in order to control their growth. These two policies echoed each other and quickly made it possible to reduce indebtedness in the real estate sector. After Evergrande Group in China got bogged down in a debt crisis earlier this year, market expectations for the real estate sector collapsed.
Caixin’s coverage of the Evergrande debt crisis
The position of policy makers of “houses to live in, not to speculate” is in line with the long-term interests of the public. Many still need to buy a new house or improve their housing conditions.
Removing the asset bubbles created by real estate speculation while supporting real and reasonable demand for real estate requires a higher level of macroeconomic regulation as well as monetary and financial supervision. This means that regulators must exercise market-oriented and risk-focused oversight, so that commercial banks can allocate financial resources according to the risk levels of each real estate project and the overall market, thereby supporting the healthy development of high quality developers and meet reasonable market demand for properties.
However, commercial banks, bondholders and home buyers have become more cautious, sometimes even too cautious. This is the method of proactive risk control of institutional investors, or perhaps a choice they considered to be politically correct. Since the middle of this year, many buyers have been waiting to see whether urban house prices have reached an all-time inflection point, which has delayed some reasonable home purchases. Various factors, including the resonance of policies, have made market expectations for the real estate sector pessimistic. The dollar-denominated real estate bond market was the first to come under pressure, followed by defaults by some developers and credit rating downgrades. Meanwhile, developers were faced with a further tightening of the banks’ credit supply. As a Moody’s report said, China’s real estate sector is already in a negative credit loop.
How to break this loop? Stopping market-oriented credit scoring activities and blocking the normal flow of information cannot solve this problem, but will only aggravate the panic.
Financial supervision is an important tool to promote the healthy development of the real estate market. But this may not be a fundamental solution. The government must tackle this problem from several angles. Deepening the reform of the tax systems of central and local governments is essential, which is the fundamental way to help local governments avoid excessive dependence on income from the sale of land. In addition, relevant government departments should make appropriate policy arrangements to help developers get out of the rut of high leverage.
The pilot property tax has received positive feedback from many rating agencies. This can help the market avoid the dilemma that homeowners dare not sell properties, buyers dare not buy properties, banks dare not issue mortgages, and developers dare not take over ownership. construction of real estate projects. However, reform of the tax and tax system cannot be achieved easily. China should carefully consider the adjustments of interests and the relationship between central and local governments. It should also adjust policies in a timely manner based on feedback from the pilot program.
In the process of building a long-term real estate regulatory mechanism, China should retain some flexibility in monetary and financial supervision. The government must be fully aware of the relationship between real estate and the financial market and calm unnecessary panic in a timely manner.
Ling Huawei is editor-in-chief of Caixin Media and Caixin Weekly.
This article has been edited for length and clarity.
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