If a sweeping property bubble that drastically inflates living costs and lifts wages is believed harmful for long-term economic growth, local governments should stop stoking house prices with higher land prices.
As an important source of revenue for local governments, the sales of land for property development have long been closely watched by local officials, eager to secure funds to support local development. However, as the central government goes all out to cool the property market to help tame inflation and avoid a property bubble, local governments should no longer feel comfortable with soaring land prices.
The average price of land in China's major cities during the second quarter reportedly increased 8.85 percent year-on-year.
As the first step to rein in house price hikes, many local governments have come up with GDP- or income-linked growth targets earlier this year to cool local property markets.
China's GDP expanded 9.6 percent in the first six months this year while the average disposable income of urban residents increased by 13.2 percent and that of rural residents by 20.4 percent. Compared with such strong growth numbers, the almost 9-percent surge in land prices may look acceptable.
Defenders of higher land prices can certainly point to the fact that more than 60 percent of major Chinese cities actually saw a slowing growth rate month-on-month in land prices. They may even argue that, though still high year-on-year, the growth of land prices has in fact fallen behind that of the national economy as well as people's incomes.
Yet, taking into consideration their impact on future house prices, no policymaker should underestimate the danger of hikes in land prices. The latest statistics show that China's new home prices fell in June from a year earlier in only three of the 70 major cities monitored by the government.
To cement the country's progress in checking the surge in home prices, the Chinese government said last week it will expand measures to rein in residential prices in smaller cities after limiting home purchases in metropolitan areas.
One reason why the central government is intensifying real-estate restrictions nationwide is that property developers still posted considerable gains in first-half sales and housing transactions climbed 31 percent last month.
The surge in land prices should be another cause for the central government to take measures to prevent higher land prices from fuelling another round of home price hikes.
In theory, higher land prices and stabilized property prices go hand in hand at the cost of property developers' profit margins.
But in reality, dearer land prices will more often than not undermine the country's efforts to avoid a property bubble. If so, local officials should be held accountable for giving full rein to the rapid rise in land prices.