In August, the PBC conducted a survey of urban bank depositors in 50 large, medium and small cities nationwide. The results indicated that in the next three months, 13.3 percent of those surveyed said they planned to buy homes, which was 2.8 percentage points lower than the rate in the same period last year. The 13.3 percent was the lowest figure since the PBC started conducting the survey in 1999. In seven large cities including Beijing, Shanghai and Guangzhou, less than 10 percent of those surveyed said they planned to buy homes within the next three months, lower than the national level.

According to figures released by the National Bureau of Statistics (NBS), the transaction volume of commercial housing sales in developed provinces and municipalities such as Beijing, Shanghai, Zhejiang, Guangdong, Fujian, Tianjin and Jiangsu all dropped by more than 20 percent from January to August of this year. In Beijing, Shanghai and Zhejiang, transaction volumes decreased 55.5 percent, 38.5 percent and 32.5 percent, respectively. By the end of August, the size of unsold commercial houses in the country had reached 130 million square meters, a year-on-year increase of 8.7 percent.

Yin Zhongli, a researcher at the Institute of Finance and Banking at the Chinese Academy of Social Sciences (CASS), told Beijing Review there were three reasons that the country's real estate market was sluggish. First, housing prices in China have risen so rapidly that people cannot afford to buy homes.

Second, China's macro-control measures have affected the real estate market. Because of excessive liquidity in the capital market and in order to prevent an overheated economy, the government has adopted a tighter monetary policy during the past two years and taken more currency out of circulation. As a result, real estate developers have been encountering problems with getting the capital they need to build their residential housing projects, while potential home buyers believe that housing prices might fall even more and are holding off on purchases, Yin said.

Third, the real estate industry has entered a period of adjustment. China reformed its housing system in 1998, when the welfare housing allocation system was changed into monetary housing subsidies. Since then people have had to buy their homes. But during the last 10 years, the country's real estate market has been a seller's market where developers have had the upper hand in transactions. In the future, this situation could change and the real estate market could become one that favors buyers, Yin said.

Stabilizing the economy

Niu Fengrui, Director of the Research Center for Urban Development and Environment at the CASS, told Beijing Review that the government's simultaneous launch of monetary and fiscal policies to stabilize the real estate market was not aimed at stabilizing housing prices, but rather at ensuring stable economic growth.

Niu said the real estate sector is a pillar industry of China's economy, and maintaining its sound development is of great importance to stabilize economic development. If the real estate industry remains sluggish, it would affect other industries, including iron and steel, cement, furniture, building materials and transportation. Moreover, because the global economic slowdown has begun to affect China's economy, it has become very important for the government to try to maintain the steady development of the country's real estate industry. NBS figures, for instance, show that in the first three quarters of this year, investments in real estate development accounted for 21 percent of the total fixed assets investment in urban areas.

Niu said under these circumstances, domestic consumption could not be effectively increased, and investment and foreign trade would continue to be the two major forces driving the country's fast economic growth. If the real estate market went downhill, investment would not drive the economy as strongly as before.

Since the end of last year, new home sales have stagnated as buyers have taken a wait-and-see approach. Because of slack sales, banks have limited developers' access to loans, stretching their capital chains to their breaking points. With 70 percent of developers' capital coming from bank loans, the banking industry itself would be greatly affected if it broke capital chains for developers. This, in turn, would create more problems in the overall economy. This is why the government introduced new measures to stimulate demand among prospective home buyers, Niu said.