Yao Yang, Dean of Peking University's National School of Development: Measures such as purchase restrictions and price limits should be promptly stopped, allowing real estate companies to lower prices to rescue themselves.

 In recent times, some major real estate companies have faced liquidity crises, once again raising concerns about the real estate market. The rapidly growing real estate market, which has seen years of expansion, is now facing serious challenges. At the same time, data from the National Bureau of Statistics shows that real estate investment decreased by 8.5% year-on-year in the first seven months of this year, remaining in negative growth for several consecutive months. The real estate industry continues to slump. How will this affect economic growth? Why do regulatory policies keep evolving but with unsatisfactory outcomes? What kind of differentiation might the real estate market experience in the future? Can buying property still lead to appreciation?

On August 22nd, Yao Yang, the Dean of Peking University's National School of Development, provided insights on the recent real estate market in the "Insightful Perspectives" column. He believes that real estate is still a sunrise industry, and the current downturn is temporary and a result of using short-term policies to address long-term goals. He suggests that if timely policy adjustments are made, expectations and confidence will be restored.

Here's the transcript of the Q&A session:

In the first 7 months, national real estate development investment reached 6.7717 trillion yuan, down 8.5% year-on-year. Among them, residential investment reached 5.1485 trillion yuan, down 7.6%. Real estate investment has seen negative growth for more than a decade. If the real estate sector cannot recover this year, how much will it impact economic growth?

Yao Yang: The sluggish real estate investment significantly hampers economic recovery. When we visit shopping centers, tourist spots, travel by high-speed rail or airplane, we notice a surge in human traffic and consumption picking up. However, this consumption has its limits; it can't be too extensive.

The stagnation in consumption is, in my opinion, linked to the significant downturn in the real estate sector. The contribution of real estate to China's economy is substantial; some estimates put it at 17% of GDP, with direct contributions around 8%, and an additional 9% from the upstream and downstream industries. Purchasing property involves not just buying houses, but also renovation, buying home appliances, and furniture. In major cities, the renovation cost of a house is around 300,000 yuan. Therefore, the real estate sector is a substantial industry.

In this context, continuous negative growth in real estate investment and a decrease in the added value of real estate will undoubtedly have an impact. Although specific data isn't available, based on the past two years, it seems that the value has dropped by around 10% annually. What does this mean? Real estate's overall contribution to GDP is around 17%. If it falls by 10%, it would drag down GDP growth by 1.7 percentage points. Why do we see relatively good statistical data but businesses feel differently? The inadequate demand caused by the decline in real estate is a crucial reason.

Companies like Evergrande, Sunac, and Country Garden are facing liquidity issues, while most of the companies acquiring land this year are state-owned enterprises. What kind of structure might the future real estate market take? Could we see a significant divergence between state-owned and private enterprises?

Yao Yang: Financing difficulties for private real estate companies stem from their inability to sell properties. Their cash flow is stuck, banks withhold loans, and the main issue is the inability to sell properties. Not all real estate companies are facing problems; some are still managing well. The issues many are experiencing are due to poor economic conditions, reduced demand, and an inability to sell properties, leading to cash flow problems. When cash flow issues arise, banks halt lending, and without loans, businesses can't operate, creating a vicious cycle.

When private enterprises encounter liquidity problems, they can't afford to buy land. In response, local governments sell land to state-owned real estate companies to support development. This might even involve government-owned companies buying land and not using it for construction, leading to the illusion of prosperity. While many state-owned enterprises acquire land, private enterprises retreat, but I believe this is a short-term phenomenon. The future real estate industry isn't likely to be dominated solely by state-owned enterprises.

This year, numerous real estate control policies have been introduced, and even policies related to existing property loans have been relaxed. But why are they not effective? What's wrong with the market? Some suggest giving developers more autonomy in pricing and allowing them to lower prices for self-rescue. How can these policies be improved?

Yao Yang: Current real estate policies seem to mix long-term issues with short-term concerns, using short-term methods to address long-term problems. In the long term, real estate should return to normal, focusing on residence while retaining some financial attributes. Real estate is mainly for living, but we can't deny that it also has financial attributes; real estate prices fluctuate with valuations. This recent reshuffling has reduced the financial attributes of real estate, and people have begun to realize this. Betting everything on property might not yield the same profits in the future.

While real estate's primary function is residence, which includes upgrading one's living conditions, this is a long-term goal. However, real estate control over the past two years has attempted to use short-term measures to achieve long-term goals. For instance, the "three red lines" policy restricts real estate loans, including loans to developers and buyers. Over the past two years, the decline in the real estate industry is policy-induced and not a natural outcome.

Some compare China's current economic situation to Japan in the 1990s, where the burst of Japan's real estate bubble led to a long-term recession. I believe this judgment is incorrect. Our real estate bubble and negative growth are policy-driven. They are intended to use radical, short-term methods, such as tightening credit, to bring real estate expectations back to reality. On one hand, developers can't have unlimited funds to build houses; on the other hand, buyers need to recognize the heavy financial aspect of real estate and understand that property prices can't keep rising forever. This is the primary reason for the real estate downturn. This bubble needed to be burst; what are the benefits? Firstly, this is a result of policy control, and now it needs further adjustment, as the bell ringer needs to untie the bell. Secondly, it aims to inform the international community that China's economic downward pressure isn't a result of China's economy itself; it's a result of government attempts to adjust real estate. China's economy still holds great promise. As long as our policies are adjusted back, economic growth is not a problem. Using short-term methods to address long-term problems is not the right approach; it will impede economic development. The lack of cash in real estate companies and the stagnation of private investment growth are due to poor expectations.

We have continuously emphasized the need to boost the confidence of private entrepreneurs. The simplest and most direct way is to achieve economic growth. Their companies need to generate revenue and profits. If revenue is decreasing, and profits are worse off, who will have confidence? Most businesses are living in the moment. If they can get through today, it's good enough. Empty talk about a bright future is futile.

This is a critical misconception that needs to be corrected.

Regarding measures, I believe a few aspects need to be addressed in the short term. Firstly, the restrictions on real estate credit should be abandoned, and the three red lines should be clearly scrapped. Secondly, struggling enterprises facing cash flow issues due to poor management should undergo bankruptcy restructuring. For instance, some companies are being slowly drained; even if they survive, the enterprises they owe might fail first. If these enterprises undergo bankruptcy restructuring, many of them still have assets. For example, land can be sold to pay off debts. Suppliers owed money can use land as collateral for bank mortgages. However, the debt currently hangs in the air. Some big companies, which aren't failing but causing the suppliers who interact with them to collapse, shouldn't drag good enterprises down for the sake of a few bad ones.

At the same time, struggling but law-abiding enterprises facing temporary difficulties should be rescued to keep them afloat. If these companies collapse, the suppliers will follow suit. This issue isn't limited to a few real estate companies; mismanagement could trigger a chain reaction.

Thirdly, all kinds of purchase restrictions and price limits should be resolutely stopped. The political bureau meeting has already made it clear that the supply and demand relationship in real estate has fundamentally changed. My interpretation is that real estate has returned to normal. If it's a normal industry, why restrict purchases and prices? When a real estate company lowers prices, local governments immediately intervene, considering it a disturbance to the market order. If properties can't be sold and prices are a good regulation mechanism, as prices decrease to a certain level, people will buy, and expectations will change.

Whether China has enough housing is often discussed based on overall statistics. We emphasize achieving a certain per capita area, comparing it to developed countries like Japan. However, Japan has small houses, making this comparison inappropriate. We develop GDP and promote technological progress to improve people's lives. People have a demand for improved housing. Some people still don't have homes, and some families with three or four members are squeezed into 50-square-meter houses. This demand for improvement can't be suppressed. Furthermore, in the next decade, almost 100 million people will move to cities. Our population is still mobile, flowing from less developed areas to more developed ones. This generates significant housing demand, and real estate will forever be a sunrise industry. Real estate industries in developed countries like the United States, the United Kingdom, and France are thriving. We need to shift our mindset. Why are current policies ineffective? Because they lack strength. Measures like "not recognizing houses, only recognizing loans" don't have much effect. We should clearly stop purchase restrictions and price limits. Price limits shouldn't just prevent prices from going up; they also shouldn't prevent prices from going down. Let the market adjust automatically.

I think with these clear signals, people's confidence will return. We often say people have no money left, but residents' savings are increasing. How can we say they have no money? People are just bearish about real estate. Prices should drop now, so why aren't they dropping? Real estate companies should be allowed to lower prices for self-rescue. Why do local governments still want to control prices?

The ineffectiveness of regulation shows that policies are in disarray, stumbling over themselves. It's like tripping over one's own feet and catching oneself with the other hand, ultimately tying oneself up. Then they shout that they want to move forward. How can they move forward? They'll just fall and hurt themselves, won't they?

In the past, we said that real estate suppressed Chinese consumption. Excessive mortgage pressures led to a decline in residents' purchasing power. But now that real estate expectations have deteriorated, can consumption potentially become the engine driving economic growth?

Yao Yang: This is nonsense from people who don't understand economics. Firstly, buying a new house costs hundreds of thousands for renovations. Isn't that consumption? If one can't afford that, they won't buy a new house. Buying a second-hand house is direct consumption. Buying a second-hand house worth millions directly contributes to GDP growth. Additionally, buying a house generates a wealth effect. If property prices keep rising, consumption will also increase. When people's wealth increases, they dare to consume.

In the past 20 years, Chinese people mainly bought houses, with about 70% of their wealth tied up in them. But now, the growth of this wealth seems to have stalled. The stock market also can't yield profits in the long term. Where should our money flow?

Yao Yang: I just mentioned that the real estate industry isn't finished yet. The current downturn is a result of government policies, not caused by the real estate industry itself. Through this market downturn, people should realize that housing prices can't keep rising forever. However, real estate's financial attributes still exist. At least in major cities, it's a good way to preserve value. But in some central and western cities, as well as in the northeast, the value of real estate has disappeared. Not only is there no growth, but prices are even declining.

The general public's desire to buy houses is understandable. But a few long-term mechanisms should be put in place to safeguard this. Furthermore, long-term and short-term problems should be addressed separately. Short-term measures shouldn't be used to solve long-term problems.

Long-term mechanisms for real estate include several aspects. Firstly, implement property taxes and a progressive property tax at that. This can curb speculation and prevent blind house buying. The tax could be based on square meterage, with exemptions for those below a certain limit. Those exceeding the limit would be subject to a progressive tax. Real speculators might find it costly to hold on to properties, which could discourage such behavior.

Secondly, there should be an increased effort to construct rental housing and encourage developers to build apartments in urban areas. I currently live on the outskirts of Beijing, close to the sixth ring road. A large area of rental housing has been constructed nearby, and many young people are renting there. Young people need rental housing, but they can only afford to live near the fifth or sixth ring road. They need to commute for about an hour and a half, which is quite challenging.

So, could policies encourage developers to build rental apartments in urban areas? I suggest that local governments designate central and even prime areas, allowing developers to build affordable rental apartments. This could meet the housing needs of the population and help curb high prices.

Actually, about 20 years ago, Professor Ma Yushou and I suggested something similar. Back then, we proposed building affordable apartment buildings, but people criticized us, saying we looked down on them and wanted them to live in cylinder-like buildings. Back then, it was good enough for young workers to have such living conditions. Unfortunately, no one listened to these suggestions. If they had been implemented 20 years ago, we wouldn't be facing today's high housing prices.

Thirdly, equalize the rights of renting and purchasing homes for children's education. Some cities are already doing this. For instance, Shanghai has controlled rental prices, resulting in a second-hand market. Those who qualify for renting prefer to buy because they can also become landlords. I think this area should be market-driven. In prime locations, rents can be higher because young people will be willing to rent there.

Moreover, the rental housing market should be standardized to protect the interests of tenants. Property owners shouldn't be able to casually modify contracts or raise prices. Overseas, tenants' rights are protected by related laws, but China is lacking in this area. Only when these long-term mechanisms are successfully implemented can the urge to speculate in real estate be completely curbed. Real estate can return to normal and to its inherent value.

Why is it that when presale properties become stalled projects and people can't get their houses, they still have to bear the responsibility of repaying loans? Banks and real estate companies don't have to take responsibility. Why does buying a house seem like investing in a high-risk financial product?

Yao Yang: I believe this is the result of policies. Firstly, it's due to credit controls. If real estate enterprises don't receive sufficient credit, they can only engage in presale or off-plan sales. This enables them to generate funds for development in advance. According to regulations, presale funds should be placed under bank supervision. However, local governments have poor supervision, allowing real estate companies to divert the money for their use. Many people don't understand that the real estate process creates currency. It requires credit. For instance, an acre of land, when used for agriculture or barren, is worth at most 50,000 RMB. But when it's converted to commercial, especially residential use, it might be worth more than 10 million RMB. Real estate companies don't have that much money. They need credit support to purchase land. But now, since there's no land, banks aren't providing loans to real estate companies. This creates a vicious cycle. Therefore, they must find other means to raise funds.

Secondly, why are real estate projects halted midway? Are there any dishonest developers attempting to defraud? Such behavior should be strictly punished, making them pay a hefty price and even sentencing them to jail. However, the vast majority of real estate developers operate legally. They just lack funds. If there are no funds, construction can't continue. So why didn't this happen before? Because banks provided developers with funds, enabling them to complete construction. Now, banks aren't lending to real estate companies, cutting off their cash flow, leaving them idle. Banks used to provide developers with loans to complete construction. Now that they're not lending, local governments need to raise funds to ensure the projects are completed. This creates a contradiction. People pay but don't get their houses. They blame developers. However, the logic here has some issues. This is a result of contradictory policies, not something developers deliberately did.