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Conundrums in the residential market

By Ed Zhang | China Daily | Updated: 2013-05-20 07:40

The price of urban residential housing continued to rise in April despite the central government's increasingly harsh price control measures and the supply of subsidized housing for low-income households.

Of the 70 largest cities, according to a government report on Saturday, 67 reported price rises for newly completed housing projects and 66 noted price rises in the second-hand housing market. The 70 cities have consequently seen a rise in the average price of houses for 11 months in a row, although the rate of rises has been somewhat dented.

Conundrums in the residential market

Obviously there is still too much money wanting to enter the housing market in comparison with all the efforts to stabilize overall price levels. In a society in which material assets are most valued as part of a happy life, a new house, for many families, has become a must when their son is ready to get married - and it is often demanded by the future daughter-in-law's family to avoid losing face with their neighbors.

A house has become the ultimate symbol of status. It is already part of the country's popular culture. It can even be said it is part of the Chinese dream for middle-class young people who grew up in the reform era.

Furthermore, a government cannot fight against a culture using economic measures alone. Using one's life savings to buy an asset that may rise in value more rapidly than investing in anything else apart from highly skillful derivative trading is a legitimate way of living one's dream - even though it is a dream not without risk because not all houses will continue to rise in value in all the cities in a nation past its peak cycle.

For the long-term health of the economy, there are better dreams. Investing in one's own business, be it a small retail outlet or a partnership in a technology-based service, can contribute to China's future in a much more creative way.

Price control measures may help moderate rises somewhat but do not provide a channel to divert the middle class away from the housing market. The market, or the spontaneous buyers and sellers, can always invent ways to circumvent the government's control measures, however harsh they may be. This was even the case during the "cultural revolution" (1966-76) when many people were criminally charged for dealing in the then outlawed "black market".

There is no way, to be sure, to encourage citizens to commit their investments elsewhere except by leveling the ground for them to do so and to enable them to earn good rewards in a relatively short time. The reason why so much money went into China's housing market was because, during the last decade or so, no important changes took place to improve the policy environment for small enterprises.

It is also why Li Keqiang, appointed Chinese premier in March, has repeatedly said he would initiate more reforms and use them to benefit the economy.

Word was spreading in Beijing last week that the "top level" has set up special work groups to design reform plans in seven key areas - on public finance, fiscal administration, land, the pricing of key production materials, administrative approval power, income distribution and the residential registration system. These, if they really work out, represent the right direction - and are certainly less costly than piling up measures to block money from going into one speculative sector of the economy while leaving other sectors devoid of opportunities.

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