Growing pains: China’s property cooling measures will stabilise economy for long-term growth

G. Bin Zhao says the Chinese government’s policies to curb the overheating real estate sector may have a negative impact on GDP growth in the short term, but a stable housing market will ensure a sustainable economy

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Though the macro control policies may dampen China’s economic performance in the short term, an affordable property market will boost China’s economic prosperity in the long run. Illustration: Craig Stephens

Published: 9:31am, 25 Feb 2018Updated: 5:35pm, 25 Feb 2018

China, in the past two years, has issued stricter policies to control its real estate market. Many local governments have limited property purchases and restricted the resale of newly bought properties within two to five years. Also, buying flats in major cities has become almost impossible without having a local hukou, a registered residence permit, or without paying income tax and social insurance in that city for a certain number of years.

The main theme of China’s macro controls on the property market can be summarised in the words of President Xi Jinping: “Housing should be for living, not for speculation”. This was adopted as the guiding principle of real-estate-sector reform at the 19th national congress of the Chinese Communist Party held last October.

Though preventing speculation can curb real estate bubbles, how will these real estate macro controls and regulations affect China’s economy? Is China ready to handle the consequence of its real estate measures?

It is widely believed that the rapid growth of the real estate market and its related sectors has been and still is one of the most important drivers of China’s economic prosperity, especially since the reform of China’s housing system in 1998.

China’s gross domestic product and investment in real estate development shared similar growth patterns over the past 20 years. In 1998 and 1999, real estate investment growth stood at 14 per cent while GDP growth was 7.8 per cent and 7.7 per cent respectively. Over the next few years, real estate investment surged above 20 per cent with the GDP growth rate at 8 per cent to 9 per cent.

From 2002 to 2011, growth in real estate investment rose from 20 per cent to 30 per cent. During the same period, the GDP growth rate was between 9 per cent and 14 per cent.