News Analysis: The difficult balancing act of China's housing market

The central government is facing a daunting challenge: While there is a glut of property stock in small cities, there is also limited land and high housing prices in metropolitan areas, posing major headwinds for the slowing economy.

THE FALLING PILLAR

The property market is failing to attract the investment it needs, official data showed Tuesday. Annual property investment growth slowed to a record low of 1 percent in 2015, a sharp decrease from 10.5 percent posted for 2014.

New housing construction projects dropped 14 percent year on year, with new residential housing declining 14.6 percent.

Once a key driver of economic growth, the slowing property market and its glut of unsold properties are dragging on overall GDP growth.

Over 718.5 million square meters of commercial residential housing was for sale by the end of last year, enough to house over 20 million people. The housing inventory is reported to be much larger.

Facing a troubled market, many property developers have refused to break ground on new projects and some have even left the sector for good. Leading property developer Wanda Group is reported to have slashed its housing sales target from 160 billion yuan (24.4 billion U.S.dollars) in 2015 to 100 billion yuan in 2016.

The medium-term outlook for the property market remains challenging despite policy support and destocking, said Zhang Dawei, chief analyst at Centaline Property Agency.

POLARIZING MARKETS

While the property market is sluggish in general, the gap between resource-intensive first- and second-tier cities and the less attractive third and fourth-tier cities is widening.

The price of new properties in southern China's commercial hub Shenzhen soared by almost 50 percent in December year on year while the northeastern border city of Dandong registered a drop of 5.3 percent year on year.

First-tier cities, with limited land supply, will continue to see rising prices and housing demand as people relocate in the next 20 years, attracted by the better education and jobs on offer, said Wang Jianlin, board chair with Wanda Group.

Chen Zhi, secretary with the Beijing Property Association, echoed Wang' s prediction and forecast continuous land and housing price growth in first-tier cities, stable fluctuations of housing prices in second-tier cities and sluggish performance in third and fourth-tier cities.

FINDING A BALANCING

The polarization of the property markets in different regions poses a dilemma for policy makers, who hope to curb rising housing prices while destocking supply.

The legislative process of real estate tax, a reform expected to curb speculation and optimize supply and demand structure, started last August. However, the reform was not mentioned by the Ministry of Finance (MOF) in its working plan for 2016, a signal that the government might put off the new tax introduction to promote destocking houses.

"This does not mean that the reform will be abandoned. It's just a matter of priority as the government has to balance short-term and long-term interests," said Jia Kang, a senior economist once serving MOF.

In addition to the relaxation of credit and taxation policies, Jia suggested, the government should encourage rural migrant workers to buy houses in third and fourth-tier cities as urbanization is a powerful tool to digest housing overcapacity and boost economic growth.

According to the Central Economic Work Conference in December, China will reform its household registration system, expand a low-rent public housing program, and revoke obsolete restrictive measures in the property market. Endit