Local boosts for properties can backfire

A number of local governments are planning to lift restrictions previously imposed on the purchase of properties. While the move will provide a much-needed boost to the market, it is hard to improve the fundamentals of the sector.

The property market has become bearish since early this year. In June, the average prices of 100 major Chinese cities dropped by 0.5 percent month-on-month, according to the China Index Academy. It is the second consecutive month prices have fallen.

The downturn has worried both developers and local governments since the latter are heavily dependent on revenues related to property development and sales.

The intervention into the market by some local governments shows that the situation in the real estate market has become quite severe. But will their intervention bail out the developers?

China's home prices have been rising at a fast pace in the past decade, forcing the central government to devise restrictive policies aimed at slowing the rising momentum. Measures to rein in the overheating housing market include higher mortgage rates and limits on how many homes each family can buy.

Similar measures have frequently been put in place in the past, but they have failed to stop price rises in the past decade－until recently.

For one thing, home prices have risen to a level that is unaffordable for many ordinary families. Demand has been on the decline as prices have risen.

For another, the overall macroeconomic situation is not favorable for developers. The slowing Chinese economy, coupled with tight credit, has strained the real estate market, making some developers cut prices as a stop-gap measure, which in turn has made potential buyers even more hesitant to make decisions.

It is fair to say that even without those restrictive policies in place, it would be difficult for developers to sell their properties at current prices. The prices of some projects in major cities, such as Beijing and Shanghai, have risen by about 10 times in the past decade. There has not been much room for another surge in sales.

Moreover, the slowing economy and the widespread expectation of a new "economic norm" of sustained slower growth constitute the biggest hurdle for property sales. Unlike some years ago, when people talked about how much more the prices of their properties might rise, people are now discussing whether the market downturn spells a real estate Armageddon that will trigger a full-blown economic crisis in China.

The changing economic fundamentals have changed people's general expectations for the real estate sector. It is similar to what happened in 2008, when the global financial crisis battered the Chinese economy and suddenly demand for real estate seemed frozen and sales slumped.

During the global financial crisis, the central government took jaw-dropping stimulus measures to bail out the national economy, which also saved the real estate sector.

This time, however, the central government will not repeat what it did during the 2008 crisis and launch massive stimulus programs, for fear of stoking liquidity and inflation. Developers, therefore, will have to rely on local policies for support in order to survive their current woes.

Local governments, meanwhile, have no other option but to help revitalize the market, since the real estate sector and related industries are the main contributors to local revenues.

The question is, will such local policy boosts bail out the developers this time?

Media reports show that some local governments plan to encourage people to buy more properties and make the banks cut interest rates for mortgages. Price cuts by developers will also be banned so that there is no chain effect from price cuts in the market.

Such measures, if implemented, are set to play a role in temporarily boosting the local property market. But just as drugs cannot ensure the long-term performance of an athlete, such boosts will not bring prosperity to the real estate market in the long run.

Such planned market intervention is risky. By postponing the inevitable, it affects the normal functioning of the market and will only backfire in the future. If that happens, local governments will have to spend more to clean up the mess.