Groundless Claim: Too Much Money Leads to Skyrocketing House Prices in First Tier Cities

Author: Fan Gang, President, CDI

Editor’s note: Since 2015, house prices in the first-tier cities are insanely increasing while they are cooling down in second- and third-tier cities. The main reason is that the current urban development strategy is inconsistent with population migration. The government restricts the supply of land resources, thus affecting the supply in the real estate market. It has nothing to do with "too much money."

Since 2015 house prices in the first-tier cities have risen sharply, while those in the second- and third-tier cities remained stable. There are two prevailing explanations: one claims that too much money is circulated in the market, and the other claims that the land is too expensive.

First of all, money, a general equivalent, is associated with the prices of any commodities. It is illogical to conclude there is oversupply of money but that is reflected only in house prices in the first tier cities. Moreover, the monetary policy has been tight over the past two years, and M2 is growing at a rate less than 10%. Therefore, it is groundless to assert “more money” has led to polarization of house prices in the first-tier cities and second- and third-tier cities. Second, the land is priced high because the developers expect high house prices, and hence readily buy land at high prices. The price of land naturally increases with the economic development. Actually the abnormal rise of land prices is mainly attributed to the wrong urban development strategy, which results in the inappropriate allocation of land. As a result, land is in short supply in the first tier cities, and there is a huge gap between housing demand and supply.

At present, China’s house price problem is a result of inappropriate urban development strategy. Therefore, it is necessary to liberalize the supply of land to solve problem. In the long run, the most crucial thing is to correct the planning for urban development, focusing on the development of metropolises. What’s more, the improvement and establishment of the property tax and lease system also has an important impact on the property market. In the short run, the purchase restriction is an important measure to effectively protect the real estate market from the real estate speculation.