(Yicai Global) Dec. 26 -- Housing is closely connected with economic growth and people's livelihoods, and has remained a main concern in macroeconomic planning over the past several years. Waves of property price increases in 2015 and 2016 triggered a nationwide market regulation campaign in late September last year. The central government is increasingly aware of the complexity of the challenges in the real estate industry.

For the first time, a considerable part of the report of the recent Central Economic Working Conference was devoted to the housing market, noting that, efforts should be made to create a multi-supplier and multi-guarantee housing system combining property sales with rental housing, and to introduce a long-term mechanism to ensure steady and healthy development of the real estate industry. Specific measures include developing the rental housing market -- especially the long-term rental market, safeguarding the interests of participants in the rental housing market, and supporting professional and institutional property rental agencies; maintaining the consistency of housing market regulation policies, clearly delimiting the powers of the central and local governments, and implementing regulation on a city-specific basis.

China's housing market is more complex today than it was in the early years of the urbanization campaign before 2012 (when residential properties were still relatively 'rare') and the destocking-oriented regulation in 2015. Housing prices soared in first-tier cities in early 2015, and the trend gradually spilled over to third- and fourth-tier cities this year. The destocking cycle has come to an end for the most part following remarkable price increases, especially in the major cities. There is still a huge gap in housing supply in the major cities despite the high property prices, whereas second- third- and fourth-tier cities have just met the destocking targets -- some of them still have a surplus of unsold properties.

Home purchase and mortgage restrictions introduced in September last year have curbed property price rises in the first-tier cities and some second-tier cities, but there are still strong expectations that housing prices will increase further fueled in part by unfulfilled demand. People in Nanjing lined up overnight to by new apartments, and some developments in first-tier cities sold out in a single day after release. This means that purchase and mortgage restrictions must be rigorously implemented in these cities to ensure policy consistency and stem real estate speculation.  

In order to address the issue of unaffordable prices -- disproportionately high housing prices relative to people's income -- in major cities, the supply and demand system should be further developed, focusing on the needs of young homebuyers.

For example, high-tech industry parks in first-tier cities have high concentrations of high-end professionals, but high apartment prices have caused a bottleneck for talent attraction efforts. Government-led regulation can put a lid on 'irrational' housing price increases, but it alone does not guarantee that young professionals' housing needs will be completely satisfied.

Developing rental housing markets alongside the real estate market is the new trend this year, and should be implemented as a central strategy in the major cities going forward. Take Shanghai for example. The city has leased 21 land parcels for rental housing developments since July, and at least 16,600 properties will be built. The local government plans to build 700,000 apartments for rent during the 13th Five-Year Plan period (2016-2020). It recently issued the plan for technology innovation center development, giving main priority to the construction of rental properties in industry parks.

The spillover effect of soaring prices in major cities and 'monetary' shantytown transformation helped some second- and third-tier cities fulfill property destocking targets. However, given the limited population growth due to the small number of new businesses and job opportunities, the real estate market boom in these cities will prove unsustainable. In other words, market regulation should focus on preventing excessive housing development and the local governments from returning to the 'land finance' model.

More importantly, China's economy must get rid of reliance on the real estate industry. If we continue to drive economic growth relying on property development, it is like 'quench thirst with poison.' This year, the top-level policymakers have reiterated the importance of curbing speculation on the real estate market and developing city-specific regulatory measures, with the ultimate goal of establishing long-term mechanisms.

Therefore, in the future, the major cities should tighten regulation further to avert irrational housing price increases, and improve housing supply systems by actively developing rental property markets, focusing on meeting the needs of young homebuyers. On the other hand, in the case of cities where a supply surplus still poses a realistic threat, emphasis should be placed on reducing public finance reliance on real estate development.

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