Automatic Adjustment Mechanisms Needed in Real Estate Market

Stabilizing the real estate market and housing prices is an urgent, major task. The effects on the economy and society of intense fluctuations in the real estate market, particularly skyrocketing housing prices, cannot be overlooked. In placing excessive emphasis on their short-term effects on economic growth, and in allowing markets to overheat, we are taking medicine with worse side effects than the original problem, and accelerating the coming of the next crisis. This lesson has been taught to us repeatedly in painful experiences the world over; we cannot treat economic illnesses using the old prescription of heating up the real estate market. Central authorities are extremely clear on this point, having noted that “housing is for living, not for speculation.” It is now both highly important and very urgent that we stabilize the real estate market and housing prices.

It will be no easy task to build foundational institutions and long-lasting mechanisms that are suited both to China’s national conditions and to market principles. Central authorities have raised the need to create foundational institutions and long-lasting mechanisms to stabilize the housing market; this comprises a complete system. This system will require cooperation from all sectors, as well as bold and sweeping reforms. With conditions pressing, we must first establish mechanisms that will support and be compatible with the system before moving on to system construction. These mechanisms need to be effective at making adjustments in both the short and long term, in order to facilitate comprehensive policies and the pooling of efforts from all sectors.

There is no time to lose in establishing automatic adjustment mechanisms to respond to abnormal fluctuations in the real estate market. History demonstrates that two kinds of methods are extremely effective in controlling the real estate market: financial and tax-related. Of those, the financial methods of setting requirements for down payment rates and interest rates on real estate loans are particularly effective. However, methods employed in the past have all been the result of man-made arrangements, making them subject to limitations of the understanding of locals or even to manipulation; some have also been susceptible to time lags. To overcome the drawbacks of man-made adjustment mechanisms, we need to create automatic adjustment mechanisms. That is to say, when abnormal fluctuations (both increases and decreases) in the real estate market hit a certain level, the mechanisms will be automatically triggered, with no need for any intervention by human beings. There are five key points to consider here. The first is monitoring indices. In this we should adopt the 70-city housing price index issued by the National Bureau of Statistics as our sole indicator. The second is control limits. We need to establish upper and lower limits, which when exceeded will automatically trigger hedging mechanisms. The third is hedging tools. Primary among these are financial methods, namely a linking of down payment rates and interest rates. If housing prices in a given city rise or fall past pre-determined limits over the course of a month (or several months), then down payment rates and interest rates will automatically increase or decrease by a certain percentage. Of course, we’re not going to employ only automatic adjustment mechanisms in such conditions. We will need comprehensive policies that will work in tandem with financial methods, with localities increasing or decreasing taxes, transaction thresholds being increased or decreased, increases or decreases in fees, and increases or decreases in land supply, all according to actual conditions. The fourth is the regions of implementation. We can start with the 70 cities. The fifth is who bears responsibility for monitoring. This can be a superior level of government and its controlling departments.

These mechanisms will be flexible and make adjustments in real time, allowing them to stabilize fluctuations whether they are moving upward or downward, and making them fully suitable to the overall demand for stability of the economy and society as a whole. I suggest that we choose different types of cities to serve as pilots as we continue to add to the foundations of research in this area, and once the effectiveness of the pilots is confirmed, we extend the program to all of the 70 cities.