CHINA – Government attempts to tighten control over an inflationary housing market in China reflect an “ingrained resistance” to necessary market reforms, according to economics consultancy Lombard Street Research.
In a note, economist Diana Choyleva said further policy tightening echoed government fears of socially divisive house price inflation. But she said it failed to address the central control of bank interest rates and barriers to capital flows, which had caused the inflation in the first place.
“Instead of addressing the fundamental causes that have driven the housing market revival… policy makers are trying to plug the gap by more direct control,” she said.
Credit Agricole senior economist Dariusz Kowalczyk said last week the government would be forced to introduce tighter curbs on the property market, including restrictions on second-home ownership.
“With social stability being of paramount importance to the new leadership, all levers of policy will be used to prevent the real estate market from heating up too much,” he said in a note. Credit Agricole anticipates a resulting decline in growth momentum from the second quarter of the year.
Data released last week suggest prices of existing houses in major cities increased 72% in January, up from 66% in December. New assets increased 76%, down from 77% in December.
Choyleva said the government’s response to the revival – which she said was indicative of a liquidity overhang created after the global financial crisis – targeted "the wrong source of funding” by requiring higher mortgage downpayments. According to the consultancy’s own figures, 70% of all property transactions in 2011—2012 were financed from personal savings.
“It’s investment demand that is driving China’s housing demand, not a surge in bank debt,” she said.
Responding to a government official's claim that the government would “continue down the same road with new shoes” to finance its urbanisation programme, she said: “No new shoes will help if policy makers don’t change direction fundamentally.”