Dubious boosting policies

The changing economic fundamentals have changed people’s general expectations for the real estate sector. It is similar to what happened in 2008, when the global financial crisis battered the Chinese economy and, suddenly, demand for real estate seemed frozen and sales quickly slumped.

As we all know, the central government took unprecedented stimulus measures during the global financial crisis to bail out the national economy, which also saved the real estate sector.

This time, however, the central government does not wish to repeat what it did during the 2008 crisis - i.e. launching massive stimulus programs - for fear of stoking liquidity and inflation. Developers, therefore, have to rely on local supportive policies to survive the current woes.

The local governments, meanwhile, have no other option but to help revitalize the market, since a large proportion of local revenue comes from the real estate sector and related industries.

The problem is: Will such policies work this time to help bail out the developers?

Media reports show that some local governments plan to encourage people to buy more properties, and they also plan to make the banks cut interest rates for mortgages. Price cuts by developers would also be banned so that there will not be any chain effect of price cuts in the market.

Such measures, if implemented, are set to play a role in temporarily boosting the local property market. But such boosts will not bring prosperity to the real estate market in the long run.

This planned market intervention is dangerous. By postponing the inevitable, it affects the normal functioning of the market and will only backfire - and, if that happens, the local governments will have to spend a fortune to clean up the mess.