Source: Lianhe Zaobao

In Today’s China, many of us may not feel it too exaggerating to associate the real estate sector with the fate of Chinese society. Is it a progress or retrogress, stability or instability, reform or revolution, happiness or unhappiness if the former determines the latter?

Actually, we have seen for years that any change in the real estate sector could affect the nerve of Chinese society. This situation has become even more serious today. People lost confidence in the property market following failed attempts by the government to regulate it. Selfish people got even crazier, hoping to grasp the last opportunity to make a fortune before the property bubble really burst.

Former BOE President, Mervyn King said in his recently published book “The End of Alchemy: Money, Banking and the Future of the Global Economy” that he learnt two things from the financial crisis that started in 2008. First, the bubbles lasted longer than we had expected. That was true for crises that happened before, and it was the same for the 2008 crisis. Both had continued for decades before the economy went back on track. Second, the bubble burst happened much faster than we had estimated.

The author labeled the financial economy as “alchemy” that will burst eventually. From whichever perspective, that is the very situation China’s real estate industry is in. People are clear that the bubbles will burst someday, though they do not know exactly which day. Before the bubble burst really takes place, they will continue to be in a “collective unconscious” state and will even add fuel to the fire.

That is the fact. In recent years, the central government stressed repeatedly that “housing is for living in, not for speculating”. However, the reality has proved to be just the opposite. Housing is for speculating, not for living in. And this situation is getting more and more serious. In spite of large numbers of vacant housing, house prices keep rising rapidly. At the end of 2016, discussions of a number of disequilibria were held at the Central Economic Work Conference. One of them was that between the real estate industry and the real economy. It is needless to say that the former has an obviously adverse impact on the latter.

What you can get from speculating on an apartment is equivalent to the value that a medium-sized real economic entity can accumulate in decades. The media are awash with such news reports as “a listed company buying a flat to save itself”, “one housing owner marrying another one with housing is equal to a merger of two listed companies”, “to buy a flat, an old lady got remarried again and again”.

To be exact, housing in China is no longer confined to its natural quality of “living in”. Instead, it involves individuals, families, collectives and moral ethics. Historically there was no country that was like China where housing had such a widespread impact on every aspect of the society.

What leads to the current situation of the real estate industry in China?

The current situation of the real estate industry development is the result of multiple failures.

1．Failure in economics

Simply starting from the relations between supply and demand, economists stress supply of land and the free flow of population. They argue that the real estate industry would not be the way it is now if there was sufficient supply of housing. Evidently, the property market is not determined by supply and demand. As we see now, housing in first-tier cities is in short supply, while second and third-tier cities have excessive housing. There is an economic assumption that the situation can change if we reform the existing hukou system to allow the free flow of population. Nevertheless, even without free population flow, the government cannot stop people flooding into first-tier cities. Beijing, Shanghai, Guangzhou, and Shenzhen all have a big population of over 20 million. In spite of that, there is still no sign of stopping.

2．Government policy failure

For years, all kinds of housing purchase restriction policies issued by the government have not achieved any ideal result. Instead, they worsened the situation. Purchase restriction is only a temporary phenomenon. Once relaxed, property bubbles will get bigger and they will burst faster.

3. Market failure

In China, there is no market of the true sense at all. Therefore, it is understandable that the market cannot play its due role. No matter how high house prices are in first-tier cities, people scramble to leave second- and third-tier cities for first-tier cities. In this case, the price factor does not play any role. The higher house prices are in big cities, the crazier people are in buying housing. They have no interest in low-priced housing in second and third-tier cities.

4．Social pressure failure

The Chinese society has always been unsatisfied with the current housing market situation and it has been showing its complaint via various channels. However, their dissatisfaction is obviously not reflected in government policies or market fluctuations. In fact, despite widespread dissatisfaction, all want to be “stake holders” of the housing market, hoping to get benefits from it. For those who have no flats, they are truly discontented. However, those who already have flats are not satisfied with unfair distribution of interest or hope for more benefits.

To avoid property bubble burst, sweeping changes are needed.

To avoid property bubble burst, thorough changes are needed. In case of bubble burst, it would affect not only the housing market but the whole Chinese society. Some observers have pointed out that in the face of rising house prices, some social groups, especially the young, have lost confidence in the governing ability of the Chinese government. Everyone needs a place to live in. However, when it has become something hopeless, it is natural to have such a feeling.

The plight that China’s housing sector is in is not attributable to the housing industry itself but to the problem of the urban system or urbanization mode. That is set out in The Future 30 years II— Risks & Challenges in the New Situation, hence I will not repeat it here. But there is one point I’d like to stress that the sick real estate sector is just a mirror of the urbanization mode of China.

Due to the peculiarity of China\s political and administrative system (for instance, the administrative level of a particular city), optimal resources concentrate in first-tier cities, especially in a small number of megacities. In this case, any intention to reform the society to promote social progress is contrary to “human nature”. That is why it finally loses efficacy or even comes to nothing.

There are many more examples to list. For example, first-tier cities are too large and have too big a population, they need to take measures to reduce population. Many cities are issuing policies to drive away those with no right of habitation in cities (most of them are migrant workers and poor people). However, it is these people who most need cities where they have access to convenient transport and good chances to find a job. In addition, hospitals in big cities are too crowded. But only big cities have good hospitals and experienced doctors. For the sake of health and life, it is human nature to see a doctor in a good hospital. Another instance, despite that school district housing is already very expensive, house prices still keep rising. That is because only schools in big cities are good and only schools of this kind can bring children a bright future.

More important, with optimal resources, big cities draw more and more people with vested interest and they are getting increasingly powerful. That makes it increasingly harder to carry out reforms. For instance, property tax cannot be implemented despite that we have discussed the issue for years. It reflects how effective the obstruction of the vested interest group is. More people with vested interest need more optimal resources and are able to get what they need. The vested interest group is the most powerful group in China.

That is the truth. Over the years, optimal resources kept flowing into megacities, while many second and third-tier cities have no access to the resources they need, let alone small towns or villages. Megacities are getting richer and richer, while medium and small-sized cities get poorer and poorer. The gap between cities mirrors the difference in interest distribution among cities.

If we cannot make any change to this logic, it will transform national development into development of a few megacities, such as Beijing, Shanghai, Guangzhou and Shenzhen. In fact, it is the development mode that relevant departments and experts have designed. That is the megacity group mode. Just as mentioned above, megacities are still expanding, even though they are excessively large. City expansion has become uncontrollable. The final result of expansion must be “explosion”.

Now, China has formed a situation of encircling cities or megacities from the rural area or small cities. The closer to the downtown area, the richer. The closer to the suburbs, the poorer locals are. Due to the declining economy, people’s salary (especially that of college graduates) did not rise, though house prices kept rising. Even though one day some are forced to leave megacities for second and third-tier cities or even smaller ones due to the exorbitant cost of living in big cities, as small cities lack resources and employment chances, a large part of them will become elements of reserves for “revolution”.

After all, in today’s China, people have owned the basic right to receive higher education and the concept of rights has been fostered among them. When this group is unable to realize their basic rights, they might turn to politics. This trend has become very obvious in Hong Kong and Taiwan. It is happening in many other places around the world, be it advanced Western countries or developing ones.

Severe disequilibrium between the real estate industry and the real economy

The central government has noticed the severe disequilibrium between the housing sector and the real economy. Efforts are now under way to change this situation. Just as we have analyzed above, the problem existing in the housing sector does not arise from the industry itself. It is a result of the urbanization mode of China. Therefore, controlling the housing sector (for instance, purchase restriction) is not enough to realize equilibrium between the housing sector and real economy, let alone balanced progress of the whole society. For the time being, the policy makers are still seeking solutions from the housing sector itself, instead of considering the problem from the aspect of urbanization mode. Therefore, measures we have taken are far from enough. To change the severe situation, we must take significant reform measures. Below are some of the measures for your reference.

1．Distribute optimal resources to second and third-tier cities via “new third-tier” construction.

Excessive optimal resources concentrating in megacities has caused huge waste and made it hard to implement reforms. The government must take actions first by decentralizing some organs to second and third-tier cities. In this regard, by conventional Chinese thinking, optimal resources will go where government agencies are.

Some large-scale SOEs can move away from megacities to second and third-tier cities. Good-quality schools, hospitals and social service agencies can set up branches in smaller cities, while their headquarters may still stay in megacities, so as to reduce opposition. Headquarters must send experienced professionals to smaller cities on a regular basis, just like how the cadre interflow system works between governments of different levels.

2．Realize a “Home Ownership Scheme” policy.

Many second and third-tier cities are faced with severe property bubbles, while more and more young people living in megacities have no place to live. Why can’t we materialize a “Home Ownership Scheme”? While introducing optimal resources into second and third-tier cities, we should encourage and attract young people to seek employment and start up businesses there, via the “Home Ownership Scheme”. By doing so, we can not only avoid the waste of having many talents concentrated in megacities, but also promote sustainable development of smaller cities.

3．Improve social policies in second and third-tier cities

As optimal resources are being distributed to second and third-tier cities, corresponding steps should be taken to improve local social policies. For example, with the coming ageing society, we can build more hospitals and rest homes in these smaller cities. In addition, schools of various kinds, sports, cultural, and entertainment facilities can also be built at the same time.

4．Speed up small town construction and rural modernization.

Even if China’s urbanization is parallel to the level of developed countries, namely 70%, there will be more than 500 million people living in the rural country. To avoid this massive group “encircling” cities causing unbearable pressure on the urban area, we cannot afford to ignore rural construction.

Due to increased enrollment in colleges and the formation of the special class of migrant workers, farmers of today are no longer conventional ones that follow the routine of “getting up at sunrise and resting at sunset”. They have become new farmers, who have the same concept of rights as urban residents. We cannot afford to ignore the rights concept of this group. Or else, that would cause a severe political mistake. Hence, we must speed up small town construction and rural modernization. This process can help us realize sustainable development and lay a sound foundation for political and social stability.

(The author is Director of the East Asian Institute, National University of Singapore, and a member of the Academic Committee of Shanghai Academy. The former title of the article is “The Housing Industry and Fate of China”. )