Reconsidering the Role of Real Estate
China's real estate market is in a stage of cyclical adjustment. Data from the National Bureau of Statistics show that in April, second-hand housing prices in 22 of the country's 70 large and medium-sized cities dropped from the previous month, and newly built housing prices in eight of the 70 cities declined over those of a month ago.
In the last several years, the country's real estate industry has developed very rapidly, pushing up overall economic growth. However, huge price hikes have not only increased risks concerning the macroeconomy and financial operations, but have also curbed the potential growth of consumption, intensified industrial structural imbalance and reduced the efficiency for resource allocation. When China is seeking new economic growth impetus through deepening the reform, it must reconsider the role of real estate industry as a pillar industry to the economy.
At present, the value-added output of the real estate industry still accounts for a small percentage of total GDP. Because of its low contribution to GDP, China's real estate industry cannot be described as a pillar industry that stimulates macroeconomic growth. From 2011 to 2013, the output growth of China's real estate industry was lower than the country's GDP growth by 2.6 percentage points, 3.6 percentage points and 1.1 percentage points in each respective year. In 2013, the value-added output of the real estate industry only accounted for 5.85 percent of China's GDP.
Most of the real estate industry's contribution to GDP comes from the concentration of capital. The real estate boom mainly benefits the construction industry and the financial industry. In 2013, the value-added output of the construction industry grew 9.5 percent, which was 1.8 percentage points higher than GDP growth and the value-added output of the financial industry went up 10.1 percent, which was 2.4 percentage points higher than the GDP growth. Although the construction industry is closely related to the real estate industry, the output growth of the construction industry stood at around 9.5 percent in the 2011-13 period, while that of the real estate industry ranged between 4.1 percent and 6.7 percent during the same period of time. It is not difficult to see that the contribution of the real estate industry to GDP growth is mainly reflected by its support of the rapid expansion of the financial industry. In 2013, the balance of yuan-denominated real estate loans accounted for 20.32 percent of the total yuan loans, up by 19.1 percent, which was 5 percentage points higher than the overall growth of loans.
An overly rapid growth in housing prices has crippled the consumption potential of the whole society and affected the stable growth of actual consumption. In 2013, China's total retail sales of consumer goods rose 13.1 percent, which was 1.2 percentage points lower than the previous year. If housing prices remain high or even continue to climb, social wealth will continue to be concentrated in the high-income group, while ordinary people and newly employed people have less money to spend. In the meantime, excessive concentration of capital in the real estate industry will also affect other industries' access to credit, hence raising the financing cost and impeding the country's industrial restructuring.
The main problem in the current real estate market is that housing prices are too high. It is unlikely that real estate prices will continue to rise. The sale of some housing projects in Beijing grew rapidly after the prices were lowered, indicating that if only housing prices dropped to the expected level, transactions would be more active. An appropriate decline in housing prices would also help release consumption potentials. It is obvious that the drop of housing prices would not necessarily be a bad thing.
China's per-capita living space has risen remarkably in recent years, reducing the possibility for the real estate industry to soar in the short term. Under current conditions, it is necessary for China to balance the role of the real estate industry in stimulating economic growth and the adverse impacts it has brought. The main task should be to correct the excessive reliance of local governments on the real estate sector and further unleash the vitality of the private economy.
This is an edited excerpt of an article by Xiang Zheng, a financial commentator, published in Securities Times
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