CHINESE REAL ESTATE MARKET
The real estate market in China is a huge sector---10 percent of GDP in terms of investment alone by the developers---and has experienced phenomenal growth rates, spurred by massive investments from abroad, from the government and from ordinary Chinese. There are building projects everywhere. Old neighborhoods are leveled to make way for new projects. See Beijing, Shenzhen and Shanghai.
The property sector is a huge employer and now accounts for about one-fifth of China's economic output. Local governments are heavily dependent on land sales to fund public services and to pay off municipal debt. Banks issued record numbers of home mortgages and construction loans, whose collateral is real estate that's now falling in value. The Property market accounts for a quarter of fixed-assets investment. Real estate didn’t even really exist as a business in the 1980s but was worth $130 billion in 2005 and has been one the biggest engines for growth. [Source: David Pierson, Los Angeles Times, December 13, 2011]
The real estate market favors developers. Buyers often have to pay for houses and apartments in advance of when they actually occupy the space and developers use that money to build new projects or buy land elsewhere. Many shopping malls, weekend resorts and coffee bars have been built by OCT (Overseas China Town), one of earliest government-owned real estate operations.
For millions of Chinese for whom real estate ownership has become an obsession. The mania has cemented itself into the national zeitgeist, inspiring a wildly popular soap opera, songs and even new slang. Debt-strapped home buyers have been dubbed fang nu, or house slaves. Couples who wed without owning a home are said to have a luo hun, or a naked marriage.
Closer look at prime real estate in Shanghai
Chinese Real Estate Boom Spread to the Hinterlands
By 2010, real estate fever began spreading to the hinterlands, where more and more people were buying homes and real estate prices were rising. Construction cranes rose in unexpected places--- namely inland second- and third-tier cities---and fears of a real estate bubble intensified as the boom grew larger and more widespread. In cities like Hefei, the provincial capital of Anhui Province, hundreds of miles from the booming costal area, taxi drivers bragged of owning investment properties, billboards advertised the latest development, people showed up with bags of cash to make down payments at sales events and property buyers doubled their investments in less than a year. [Source: David Pierson, Los Angeles Times, March 2010]
The average income in Hefei is around $2,000 a year. Even so apartments were selling for as much as $120,000. One ambitious development project contained apartments for 80,000 people and a 4.3-million quare-foot shopping mall with subway and elevated-highway links to downtown Hefei. Local officials encouraged the trend by granting permits to developers at the drop of hat as they sought revenues through leases and development fees.
One apartment buyer in Hefei, a 27-year-old television cameraman, told the Los Angeles Times, “For people of my generation, property is all we talk about. I felt a lot of pressure to buy because the longer I didn’t, the more likely I wouldn’t be able to afford anything.” The boom in the city is so intense that it is estimated that 15 percent of the city’s residents are construction workers, streets are pitted with truck-caused potholes and drivers take shortcuts through city parks too avoid construction delays.
Chinese Developers Sit on Prime Plots, Choking the Property Market
Yasushi Kouchi wrote in the Japanese newspaper the Yomiuri Shimbun, “Nearly 3,000 vacant lots in urban areas of China are being kept free of development, reducing the supply of real estate and pushing up prices as well as creating a serious backlog of residential and commercial construction projects. The Chinese government has finally started to look seriously at the problem, which recalls a practice that was rampant during Japan's bubble economy period--forcibly evicting people from properties so they could be sold later for hefty prices on the booming market. [Source: Yasushi Kouchi, Yomiuri Shimbun, November 12, 2010]
Situated by the 3rd Ring Road in Beijing, a loop route that runs through the center of the capital, is a fenced-off 6,000-square-meter vacant lot. There are buildings on almost every side of it. A major developer won the usage rights for the lot in 2005 and was scheduled to complete construction of a huge office building there in 2007. However, it seems that even basic preparations for construction are yet to begin.
Developers cite "opposition of surrounding residents," for instance, as a main reason for delays in development, but it is widely suspected that they are simply waiting to resell the properties or start construction after prices have risen to a certain level. According to the China Business Daily newspaper, property prices near the vacant lot by the 3rd Ring Road have soared to about 20 times the level of five years ago, on a per-story basis. Extraordinarily, the market value of one Beijing plot has risen to 375 times the price paid for it by Hong Kong developer New World China Land in the summer of 2004.
Some observers blame local governments for contributing to delays in development. For instance, a site in Zhangzhou, Fujian Province, was purchased by major Hong Kong real estate developer Sino Group, which went as far as holding a groundbreaking ceremony for the planned development project. However, construction was postponed because the local government fell behind schedule on procedures to transfer residents from the site and compensate them.
The Land and Resources Ministry and the Housing and Urban-Rural Development Ministry on in September 2011 announced a plan to rectify the growing problem. According to a joint statement from the ministries, developers who fail to start developing land a year after acquiring a plot at auction will be barred from bidding for additional land until delays on the original property are rectified. The measure, designed to prevent developers hoarding land with the intention of making resale profits once prices rise, has met with praise.
Real Estate Speculation and Debt in China
The amount of money floating around in real estate has encouraged speculation and corruption. Officials often obtain choice pieces of property at bargain prices. Disputes are often settled through connections rather than rule of law. There is a lot of speculation. Sometimes properties and even housing are sold many times before a single brick has been laid.
Among the hottest places for real estate investment and speculation has been Shanghai, where real estate values increased by 20 percent a year in the early and mid 2000s and stories abounded of people buying apartment for $150,000 and doubling their investment in four years and real estate companies bringing in rich investors from the province by the busload to purchase properties.
Speculators in Shanghai and Beijing have hired migrant workers to wait in land to snatch up investment properties and apartments at trendy addresses and quickly resold them for handsome profits and then sitting back and congratulating themselves for making a killing by doing nothing.
Many developers make big money by pocketing part of a project’s construction costs by guiding contracts to construction companies in which they have stake. They are not that worried about be unable to find buyers or renters. If a project fails it is usually the investors and banks that financed the project that are left holding the bag. Many of China’s bad loans were created this way.
See Beijing, Shanghai
Inflated Property Market in China
The property markets in Beijing, Shanghai are highly inflated. By most measures prices are unrealistically high. Building continues at a breakneck speed even though there is a lot of unrented space. In Shanghai, real estate prices have soared by 300 percent and workers have waited 72 hours in the freezing rain to snatch up apartments for $100,000 to $200,000.
The costs of a new apartment in many cases is equal to 10 to 25 years of the year income for even middle class Chinese. In Beijing ordinary middle class people are paying $2.400 a square meter---about the equivalent of property in Los Angeles---for small two bedroom apartment near the site of te 2008 Olympics, paying 15 times their annual income.
There are worries the real estate boom could make housing unaffordable to middle class Chinese. There are also worries that if that the real estate market crashes many middle class Chinese would lose their saving or be stuck with low value homes and high loans to pay off. Middle class families have already gone deep into debt to buy homes. In some cases they decided to buy properties at high prices out of worries that the prices would be even higher and more unaffordable in the future.
In spite of efforts to cool down the property market prices rose a record 9.5 percent in October 2007 with two-room apartments in Shenzhen, with a view of Hong Kong, fetching up to $1 million a piece.. The rise was blamed on the export market in China which left China flush with cash and investors anxious for some place to put their cash
High Real Estate Price in China
Housing prices continue to climb even though Beijing has long promised to curb the property market and to spend billions of dollars over the next few years on affordable housing. Prices in the southern boom town of Shenzhen rose 33 per cent in 2010, and they were up 23 per cent in Guangzhou.
The price of new apartment in Beijing reached $3,100 a square foot at the Beijing real estate Expo in May 2010, double the price from the previous year. That put the price of a 90 square meter apartment at $280,000. Average home prices in Beijing continued to rise by more than 25 percent after that. In January prices stood at nearly $3,600 per square meter, according to the China Index Academy.
The average apartment in central Shanghai now costs more than $500,000. Even in second-tier cities like Chengdu, in central China, the price of a typical home costs about 25 times the average annual income of residents. [Source: David Barboza, New York Times, April 17, 2011]
Clifford Coonan wrote in the Irish Times, “About “310 billion was spent on land transactions in 2010, a 70 per cent rise on the previous year. The biggest jump in property prices was in Beijing, where they rose 42 per cent, with the average price 20,328 yuan ($3185) per square meter. Shanghai’s price hike ranked second, with 40 per cent, although it is the most expensive market, with prices reaching 22,261 yuan ($3488) per square meter, and $40 billion worth of residential properties were traded, despite government efforts to cool the market. [Source: Clifford Coonan Irish Times, January 22, 2011]
Some speculators have made fortunes on the trend. Some peoplehave reaped big profits over by selling apartments soon after buying them---even lower-priced property farther from downtown areas have generated gains of 40 percent.
Causes of High Real Price in China
Clifford Coonan wrote in the Irish Times, “China’s real-estate boom stems from a powerful cocktail of factors. With inflation running at about 5 per cent, there is no point keeping your money in the bank because the deposit rate is only about 2.5 per cent. So people look for other investment vehicles. With the stock market looking pricey, the classic investment is property.
On top of this there has been loose bank lending encouraged by stimulus measures imposed after the 2008-2009 recent financial crisis.
Howard Schneider wrote in the Washington Post, “While there may be a speculative aspect to the recent rise in prices, the underlying surge in property values is driven by basic economics. Millions of Chinese are moving from villages to cities, their wages are rising and national economic growth remains strong---trends that many analysts expect to continue for years. Even if values drop sharply in coming months, “it is in the context of prices that went up 55 percent,” so investors and lenders could well absorb the fall, said Arthur Kroeber, managing director of the Dragonomics consulting firm in Beijing. Since major banks are state-owned, they would be quickly buttressed by the central government if problems develop.
Housing Bubble in China?
In December 2010, a Chinese government think tank---the Chinese Academy of Social Sciences---warned China’s real estate bubble is getting worse, with property prices in major cities overvalued by as much as 70 percent. Of the 35 major cities surveyed property prices in eleven including Beijing were 30 percent to 50 percent above their market value Prices in Fuzhou were 70 percent above their market value.
Nariman Behrvesh, an analyst at Global Insight said, “Can China deflate its real estate bubble without generating a hard landing? It’s a serious problem. The Chinese themselves are quite worried about it...If you look at the ratio of home values relative to GDP, China is about the same level as Japan’s before Japan’s bubble burst.”
“There is some research out there looking at housing and asset prices in China, and there are indications that the property market is somewhat overvalued in China,” Brian Lucey, associate professor of finance at Trinity College Dublin, told the Irish Times. “The question is whether that could be a major problem, and that I don’t know. It could be that it doesn’t go to the heart of the economy and could be absorbed by the broader economy.” [Source: Clifford Coonan Irish Times, January 22, 2011]
A realtor who has managed a property agency for the past 14 years told the Irish Times, “There is no bubble, but there is a conflict between supply and demand. In the past four or five years the number of new apartment buildings in Beijing is falling, probably by about 60 per cent, while demand has doubled or trebled. So for sure the price will go up. People’s incomes are rising; the numbers of people moving to the city is rising.”
“People about 30 years of age need a home, want to start a family, but their parents are still young, and they don’t want to share with them. So what do you do? And with the move from the rural areas and villages to the cities in recent years, more and more people are here in the big city. With such huge demand in a city such as Beijing, where land is limited, demand is sure to rise,” the realtor said. “The government has gotten smarter; they understand that it’s better to let the market decide the price, and then they set up a scheme to protect middle- and low-income earners.” Much of the rise of the market is attributable to China’s incredible process of urbanization. China has seen the number of city dwellers rise from 18 per cent of the population in 1978 to 46 per cent in 2008, a rise of 28 per cent in three decades. About 300 million Chinese now living in rural areas---the equivalent of the population of the United States---will move into cities in the next 20 years, and by 2025 at least 220 Chinese cities will likely have more than a million inhabitants.
Meng Xiaosu, chairman of the China National Real Estate Development Group Corporation, does not believe that China’s property market is in bubble mode right now. “For me the key to whether it’s a bubble or not is whether it can be burst, and I believe the Chinese real-estate market will increase in a stable way,without any kind of exaggerated increase,” says Meng. “And, even better, if the supply of houses pulls the economy along while avoiding prices going too high, while guaranteeing that low-income families can afford to buy or rent homes for their own use.”
Ye Tan, an independent economist and commentator, believes the fallout from an end to the bubble can be managed. What happened in the West a couple of years ago will not happen in China in the same way, since there is no subprime lending here, but if the bubble bursts people will have no money, consumption will dry up, there will be a lot of bad bank loans and no one will borrow money any more,” she says. Luxury and land: The young rich splash the cash
Housing Bubble Starting to Deflate?
David Pierson wrote in the Los Angeles Times, “Skepticism runs especially deep when it comes to real estate, which represents about a fifth of China's economic output, by some estimates. In a pattern eerily similar to the U.S. housing boom, easy financing in recent years unleashed a Chinese development frenzy that sent prices soaring. Eager home buyers camped out for the chance to buy into planned developments, sight unseen. The typical 1,000-square-foot apartment in Shanghai costs $335,000, about 45 times the average resident's annual salary. [Source: David Pierson, Los Angeles Times, November 28, 2011; Lucy Hornby and Langi Chiang, Reuters, December 2, 2011]
Now China's housing bubble is deflating. Home prices nationwide declined in November for the third straight month, according to an index of values in 100 major cities compiled by the China Index Academy, an independent real estate firm, as cash-strapped developers became desperate to unload homes. An index of 35 major cities showed 29 had experienced a decline in sales from a year ago; sales plunged more than 50 percent in six of them, including Beijing.
The Chinese government says it's all part of the plan. After loosening the credit spigot during the financial crisis to keep the economy humming, it's now tightening lending and clamping down on speculators. But critics said the damage has been done. Behind China's gleaming new high-rises, freeways and bullet trains, the bears see ghost towns, empty roads and superfluous rail lines. Public debt has exploded, raising fears of an overload that could weigh on China's economy.
"A lot of that growth was just state-led investment on a massive scale," said Victor Shih, a political scientist at Northwestern University and expert on Chinese local government debt who is firmly in the bear camp. "China is a behemoth now. If it gets in trouble, everyone gets in trouble." Faced with a growing number of clients worried about China's prospects, Tao Wang, a Hong Kong-based economist at financial services giant UBS, recently released a research note aimed at calming investors' fears. "We have had to refute different arguments about why China is about to collapse or implode every day," she wrote.
China's Ordos Property Bust Offers Warning Sign
In December 2012,Lucy Hornby and Langi Chiang of Reuters wrote: The monumental, neo-Mongolian sculptures, empty plazas and hulking concrete shells of buildings in Ordos district, deep in the steppes of Inner Mongolia, are a potent symbol of how China's property boom can turn to bust.Off the back of a thriving coal industry, the local government has been building a new city for one million people called Kangbashi. It sits virtually empty and property prices are falling. Even in the old city of Dongsheng where people live and work, some 45 minutes drive away, a wave of investment has backfired. Cranes sit idle over unfinished skyscrapers and migrant workers are fleeing. [Source: Lucy Hornby and Langi Chiang, Reuters, December 2, 2011]
The swing in fortune -- residents and property agents say prices have dropped by up to a third -- is a severe example of what is happening in cities across China, including Shanghai and Beijing. After a housing bubble that doubled values in 35 cities between 2004 and 2009, prices are now falling nationwide. The central bank said property prices had reached a turning point while banks are worried a price slide of 20 percent could trigger panic selling."People are worried. Especially if they have bought two or three apartments," said Yu Mingjun, a worker sitting in a down jacket at a ramshackle office of a half-completed project in the old town.
In empty showrooms of Dongsheng, Ordos' old city, saleswomen immediately offer 30 percent price discounts if a buyer is willing to pay for a property upfront and in cash. Chinese and foreign media seized on Ordos as the prime example of wasteful and pointless government projects after the government built the sprawling new city of Kangbashi.
Investors view ghost towns like Kangbashi as an example of the sort of excesses that could pull hard on the reins of the country's growth.On Thursday, a policeman shooed a Reuters cameraman away from the Wenming ("Culture") property development right near government buildings in Kangbashi, as workers bearing shovels walked in to demand their last payment before heading home. "Kangbashi is a sensitive place now," he said.
Housing Bubble Losing Air in Beijing and Shanghai
Prices have plummeted 20-30 percent in certain property developments in Beijing and Shanghai Average prices in the Shanghai area are down about 40 percent from their peak in mid-2009, to about $176,000 for a 1,000-square-foot home. [Source: David Pierson, Los Angeles Times, December 13, 2011]
David Pierson wrote in the Los Angeles Times: In Beijing, nearly two years' worth of inventory is clogging the market, and more than 1,000 real estate agencies have closed this year. Developers who once pre-sold housing projects within hours are growing desperate. A real estate company in the eastern city of Wenzhou is offering to throw in a new BMW with a home purchase.
The swift turnaround has stunned buyers such as Shanghai resident Mark Li, who thought prices had nowhere to go but up. The software engineer closed on a $250,000, three-bedroom apartment in August, only to watch weeks later as the developer slashed prices 25 percent on identical units to attract buyers in a slowing market. Outraged, Li and hundreds of others who paid full price trashed the sales office, scuffled with employees and protested for three days before police broke up the demonstration. Walking away now would mean losing the $75,000 down payment that he borrowed from his working-class parents.
Li said: "The sales agent told me prices wouldn't go down, that I was getting the best deal," he said. Li plans on marrying his girlfriend this time next year, when the apartment is scheduled to be finished. He'll have to devote half of his $1,500 monthly salary to pay the mortgage. Li said he hasn't worked up the nerve to tell his parents how much his apartment has fallen in value---not after they lent him their life savings for the down payment. His father, an electrician, and his mother, a middle school teacher, live in Jiangxi, a poor province southwest of Shanghai. Frugal savers, they insist on walking wherever they can to save on bus fare when they visit their son in the city. "I really thought I could save enough for a house," Li said. "But over the years, property prices grew so much faster than my salary. I couldn't play this catch-up game. I had to ask my parents for help or I'd never settle down."
Consequence of a Deflated Property Bubble
Lucy Hornby and Langi Chiang of Reuters wrote: Top Chinese leaders have vowed to keep in place measures aimed at clamping down on the country's property inflation until prices return to reasonable levels. But prices in Ordos have already fallen below the level that analysts say would cause serious problems if mirrored nationally. Nationwide, the decline is so far more modest. [Source: Lucy Hornby and Langi Chiang, Reuters, December 2, 2011]
With local governments often dependent on land sales to fund payments on a staggering 10.7 trillion yuan ($1.7 trillion) of debt, Beijing worries that a collapsing property market will trigger a wave of defaults that in turn will hit the banks. "If society demonizes the property sector, especially if buyers think prices will fall, creating a sharp cooling off for instance 30-40 percent, I think that's very serious," said Hui Jianqiang, head of research for consultancy E-House China.
More worrisome, the property market, which contributes about 10 percent of Chinese growth and drives activity in 50 other sectors, could drag the real economy to a hard landing. A pair of purchasing managers' surveys last week showed China's factory output shrank in November to the lowest level in three years, feeding worries about whether Chinese growth can keep powering the global economy.
A real estate crash would reverberate well beyond China. The building binge helped fuel a global boom in raw materials including Brazilian iron ore and Chilean copper. And it would hobble an economy the rest of the world was counting on for new consumers and investment opportunities. The Paris-based Organization for Economic Co-operation and Development warned last month that a collapse of some major Chinese real estate developers would put the nation's banks at risk, a threat that's "overshadowing" the economic outlook of the world's second-largest economy.
David Pierson wrote in the Los Angeles Times: With property values now falling, angry home buyers have staged at least seven demonstrations in the last three months in cities including Beijing and Shanghai. Mobs have destroyed real estate offices and demanded refunds of up to 40 percent after developers dropped prices for later buyers. The protesters have garnered little sympathy on China's microblogs, a Twitter-like national nerve center with 300 million users. Many bloggers have denounced the home buyers as speculators hoping to make a quick buck by flipping units. [Source: David Pierson, Los Angeles Times, December 13, 2011]
"You deserve this!" read one comment on the most heavily used service, Sina Weibo. Such criticism isn't fair, wrote homeowner Wang Zeyi, who bought a unit in the same complex as Li in Shanghai. "Most of us home buyers really just bought for ourselves to live in," Wang posted on her Sina microblog. "And overnight, the assets just evaporated."
Collapse of the Property Market?
The possibility of a real estate collapse is very real. In the mid 2000s the hot property market in Shanghai began to slump. In other places growth ground to a halt, prompting developers to slash prices and real estate brokerages to shutter thousands of offices. Homeowners began worrying whether they could afford their house payments and banks began worrying about getting saddled with loans that couldn’t be paid back.
Century 21 China estimated that 3,000 brokerage offices closed down in Shanghai during the slump. Those that remained open saw their incomes plunge by two thirds. Speculators who paid $100,000 to $200,000 for apartments saw their value decline by a third. There were reports of people jumping of off office towers rather investing in them. Stories scared off buyers, causing the market to decline further If the bottom falls out of the real estate market, banks could be saddle with massive bad loans and this could have major repercussions not just on the economy in China but on the global economy.
In 2005 the government began taking measures to stave off a real estate collapse. It raised mortgage rates and set limits on how much could be borrowed for property-related purchases and made public announcements that land speculation poses a threat to the economy and social stability. Home owners were required to make down payments of 30 percent, up from 20 percent, capital gains taxes were imposed on home sellers profits and a new 5 percent tax was levied on houses sold before two years of ownership.
The government has also banned the building of new luxury villas and stopped some developments to cool the real estate market. In Beijing an open auction system has been introduced to discourage corruption. It has yet to be seen how well these measures will work. Counter strategies such as buying factories to get land rather than buying land outright have been developed by developers and speculators.
Zhu Rongji on China’s Housing Problem
Zhu, Rongji served as premier from 1998 until 2003. Before that he initiated and implemented a tax sharing system that gave the central government the lion's share of the country's taxation revenue. Wu Zhong wrote in the Asia Times, “Zhu's first move, after he was appointed as vice premier in charge of economic affairs in 1991, was to reform the taxation system so that the central government could have more money. [Source: Wu Zhong, China Editor, Asia Times, June 22, 2011]
In response to assertions that China’s real estate problem stems from the tax sharing system because the central government takes the lion's share of the country's taxation revenue and regional governments are so poor that they have to rely on property development for fiscal incomes. This is bullshit!" and then listed off figures on how much money the regional governments got. “The regions got 7.3 trillion yuan in total. Still not enough? Still poor? Now regional governments have plenty of money," Zhu said.
Zhu said that current policy was to blame for rising housing prices. "The crux of the problem is that our housing reform policy is wrong ... All property revenues go to regional governments and they are even allowed to mark such revenue as extra-budgetary income." This means the funds are not subject to scrutiny and supervision of local legislatures. "This is horrible. Such incomes in fact are made by exploiting people by pushing land prices so high. This is absolutely not a consequence of the tax sharing system."
In recent years, a number of economists have seen this problem and proposed that Beijing take the power back from regions in land deals. Some have suggested that the Ministry of Land and Resources be empowered to scrutinize and approve any change of land use for the purpose of property development. Others have proposed that Beijing demand all revenues go to state coffers first and then get paid back to the regions concerned. So far none of these policies has been adopted by Beijing. This is likely due to either fear of accusations China has returned to a central command economy, strong resistance from the regions, or both.
Efforts to Combat China’s Housing Bubble
Vivi Lin and Lucy Hornby of Reuters wrote, “To tame discontent, China has taken a slew of measures since 2009 to rein in the red-hot property market, including raising down payments and mortgage rates, and limiting the number of homes that one family can buy. [Source: Vivi Lin and Lucy Hornby, Reuters, March 7, 2011]
Many measures taken to help the economy as a whole were particularly aimed at the property and real estate markets. In May 2010, the Chinese government ordered banks to set aside more deposits as reserves to reduce the risk of property bubbles and inflation. The People’s Bank of China raised Benchmark raised interest rates four times between October 2010 and April 2011 and has required banks to lock up a record 20 percent of their deposits to curb excess liquidity and overheating. When interest rates are low and lots of cash is around (excess liquidity) people have a tendency to buy property, stocks and other assets, a situation that encourages speculation and bubbles and drives up prices further. High interest rates and tightened liquidity are ways of preventing bubbles and inflation that encourage people to put their money in the bank to take advantage of high rates
There have also been measures targeted directly at the housing market. In February 2011, the Chinese government began taking serious steps to reign in housing values. In Shanghai and Chongqing and property taxes were introduced. Beijing’s local government imposed tight restrictions on who is allowed to buy property. No one can buy property in Beijing now unless they have paid taxes here for five years, a rule that curbs speculators from elsewhere in China or outside it, but also upsets the aims of new residents who want a place to live. The national government upped the required down payment on second homes to 60 percent from 50 percent. Down payments for first homes reached 30 percent. Banks were ordered not to provide loans for third, forth or fifth homes.
In March 2011 about 40 cities said they would cap new home prices below annual economic and disposable per capita income growth levels.
Cooling the Chinese Real Estate Boom
To cool the real estate boom. Banks were ordered to stop giving montages, property taxes and down payments were raised and a ban on buying third apartments was put in place. In Beijing a ban on buying second apartments was initiated and people who had not paid taxes or made social security contributions were barred from buying property.
The measures quickly caused apartment prices in Beijing to drop by 10 to 15 percent and home sales to slump by 50 percent. Speculators though exploited loopholes and were able to keep buying up properties with cash. There were reports of couples getting divorced so they could buy a second property.
Effectiveness of Efforts to Combat the Housing Bubble
Sabrina D. Wei, head of research for property firm DTZ in Beijing, told the Washington Post she could sense the pressure building last year. The central authorities first attacked the problem with interest rate hikes and stricter bank lending rules, but each round had limited effect. The number of monthly sales would drop, but within weeks rebound to even higher levels. “It was kind of out of control,” she said. [Source: Howard Schneider, Washington Post, April 18 2011]
Howard Schneider wrote in the Washington Post, “The local rules, by contrast, are starting to bite, and the issue being watched now is what type of aftershock is coming. The local Xinhua news agency recently reported a steep drop in cash flow among developers---a sign that sales may be slowing, but also, some analysts suggest, a precursor to deeper trouble for the companies and the banks that financed them. Ratings agencies like Fitch and other analysts say they are expecting a jump in bad loans as a result of the loose lending policies used to boost the economy during the 2008 crisis.
Prices have kept on rising even after the government took measures to reign them in. Zhang Xon, a famous developer with Soho China Limited, said, “I my own view, the market economy has gotten to the stage that it’s very strong and sizable, that it is much stronger that the government thinks, and that’s why these measures have not been the most effective.”
Measures Take to Stabilize the Chinese Property Market
David Pierson wrote in the Los Angeles Times: The decline in property values is eerily similar to the early stages of the U.S. housing crash. The big difference is that the Chinese government intentionally slammed on the brakes. Over the last year it has tightened lending and prohibited the purchase of more than one home in several cities, in a bid to discourage speculators and bring down prices. Chinese authorities say they're trying to tame inflation and defuse public anger over housing costs, the fallout from the government's efforts to stimulate the economy with easy credit during the global financial crisis. They have pledged to keep home buying limits in place for the foreseeable future.
Lucy Hornby and Langi Chiang of Reuters wrote: China cut its required reserve ratio (RRR) for banks this week, thereby freeing up more cash for lending. Many interpreted that as a sign that China had swung toward easing, although it remains unwilling to cut interest rates. "The RRR cut is not a timely enough rain to water the developers' drying cash flows. But it signals a policy change and could help boost market confidence," said Zhang Yue, research head of Home Link, a Chinese real estate consultancy. [Source: Lucy Hornby and Langi Chiang, Reuters, December 2, 2011]
Many analysts expect Beijing to keep property tightening steps in place, including curbing bank lending to developers. Worried about inflation and a speculative bubble, officials remain wary of relaxing policy. But local governments may not be able to wait. As developers cut prices, they will see a drop in demand for land sales, which bulk up their budgets. Falling revenues will give them incentive to quietly loosen restrictions on property -- such as rules limiting the number of homes families can buy -- in their areas.
"China's severe tightening measures have already reined in property speculation. They have also hurt healthy demand for first homes and second homes for better living conditions," said Jiao Qing, president of Beijing Zhongkun Investment Group, a Chinese developer. "Just like driving, once you have braked hard and brought the car to a sudden standstill, it takes a while to restart the engine."
Governments in Beijing, Wuhan, and Hangzhou -- all places with more natural demand than Ordos -- have issued policies to help the housing sector in the past two weeks. In Ordos, the government announced a bailout fund of between 7.5 billion and 10 billion yuan ($1.18 billion to $1.57 billion) to support its beleaguered developers. Still, that may not be enough. A commercial real estate agent, who only gave his surname Li, said that despite the government actions he was planning to return to his native Guangdong Province after six unsuccessful months in Kangbashi. "There isn't much commercial real estate here. You need private businesses for that, and here it's all government money."
If Beijing can manage to orchestrate an orderly pull back in prices, policymakers need look no further than Dongsheng as an example of the future of the property market. Typical of Chinese provincial cities, many of its 600,000 residents live in trim, low brick buildings that are dark, cramped and indifferently heated. Their demand for better housing is likely to sustain China's housing market for decades to come, as long as a hard landing doesn't wreck the economy. But in Dongsheng, the restaurants are already noticing that customers are drifting away. "The decade of explosive growth in China's real estate industry has gone. Developers must think about a shift in their strategies now and aim for the long term," said Jiao, of Zhongkun Investment. "China can undertake a home price cut of up to 30 percent. But I'm not sure about what will happen beyond that."
Time for a Chinese Property Tax to Stabilise the Wild Property Market?
In February 2012 The Economist reported: In other parts of the world local governments raise revenues by taxing homes based on something like their market value. In China taxing property is a touchy subject. The government had tried imposing a variety of levies on the sale, size and historical cost of property, but none on the market value of homes. That changed a year ago, when Chongqing and Shanghai, two giant cities, introduced a pilot tax on some upmarket homes. The tax was largely symbolic, levied at low rates on a few thousand homes in each city. But it nonetheless set a precedent. China should now broaden that tax to as many properties as possible, in cities across the country. [Source: The Economist, Feb 4, 2012]
For local governments a fully fledged property tax would provide a stable source of revenue. Unlike workers or businesspeople, homes cannot up sticks and leave. A property tax raises revenue year after year, in contrast to a land lease, which can be sold only once. What’s more, such taxes allow local authorities to capture some of the value they create: as they invest in local amenities, property values rise, and so do the taxes they are able to collect.
A property tax could also temper the wild swings in China’s housing market. A recurring levy would make it costlier to buy and hold a second or third home as a speculative bet on rising prices. That would force some absentee homeowners to sell their vacant flats or rent them to the many citizens priced out of the market. Some economists believe that the light taxation of land in Japan contributed to its ruinous asset-price bubble in the 1980s.
A property tax would by no means be easy to implement in China. It would require homes to be registered, title to be clear and the appraisal of property values to be credible. But similar obstacles have been overcome in other developing economies, including many cities in India.
Under Chairman Mao, taxes on private property all but vanished along with private property itself. Today’s Chinese set no store by the old socialist doctrine that “property is theft”. But many urban Chinese now think of taxation that way. They feel, with some justification, that they already pay too much to a state that provides too little.
This antipathy is not lost on China’s local governments. They are wary of angering the urban middle class, who own their own homes, and the city elites (including party officials and their families), who usually own several. So they continue to cause anger by throwing rural folk off their land. China must now act boldly to reform its taxation of property. Otherwise it will have to face the consequences of continued weak local-government finances and even more social unrest.
Positive Signs in the Chinese Real Estate Market
David Pierson wrote in the Los Angeles Times: Some analysts, however, contend those fears are overblown. Hundreds of millions of rural Chinese are projected to move into cities in the coming decades, bolstering demand for new housing. And Chinese aren't nearly as leveraged as Americans. First-time buyers are required by law to come up with down payments equal to 30 percent of a home's purchase price; many put down more. Experts say the government could also lift its buying restrictions. [Source: David Pierson, Los Angeles Times, December 13, 2011]
"I don't think China is in danger of a U.S.-style housing crash," said Alistair Thornton, a Beijing-based analyst for IHS Global Insight. "They still retain lot of levers of control should the property market slide faster than expected."
But for now, Thornton said, Beijing is committed to shoring up its credibility after promising to bring housing prices back to Earth. Since the government began opening the sector to private ownership in the 1990s, "the market has only gone up” and they want to put across the message that it's not a one-way bet," he said.
Chinese Buy Up Property Abroad
Langi Chiang and Koh Gui Qing of Reuters wrote: “Stifled by a clampdown on property speculation at home, cash-rich Chinese are buying up homes in Australia, the United States, Britain and Canada instead, countries popular with Chinese students studying abroad. Amanda Sun bought three houses in Australia's coastal city of Gold Coast after visiting the town just once as a tourist. The 33-year-old owner of a small trading firm is one of thousands of Chinese who are beginning to export China's house price inflation abroad by piling into property markets overseas. "Australia allows higher leverage and its legal system is better," said Sun, who plans on migrating to Australia to live in one of her newly-bought homes and rent out the other two. [Source: Langi Chiang and Koh Gui Qing, Reuters, April 14, 2011]
Property developers are courting the international rise of the wealthy Chinese home buyer with ardor, marketing their projects in Shanghai and Beijing. CB Richard Ellis (CBG.N) has set up a special arm to help Asian buyers purchase homes abroad. China's biggest real estate website, Soufun Holdings (SFUN.N), has been bringing Chinese investors to tour Western cities in the past two years. "The Chinese are my most important clients now," said Cindy Chan, chairman of AGC Property Center Pty Ltd, Sun's property agent in Australia. "The number is growing very fast." Business is so good that Chan visits China every other month to showcase homes on sale in Australia. She plans to start an office in Shanghai in May.
Chan and other property agents could be a lot busier if not for China's strict capital controls. Chinese citizens are barred from buying more than $50,000 worth of foreign currencies a year, restricting them to smaller property purchases when they venture abroad. There is talk that the cap may be raised to $200,000, but that is just unconfirmed chatter so far.
To beat the rules, Sun, like many other Chinese, turned to her relatives for help. They pooled their annual quotas together to give her enough foreign currency to put a downpayment on the three houses, which were worth a total A$3 million ($3.1 million). Others sneak their money out of China by disguising the funds as import bills.
Anxiety in New Zealand as Chinese Try to Buy Dairy Farms
In January 2012, AP reported: Chinese investors are buying New Zealand farmland for the first time as economic ties with the Asian powerhouse grow ever deeper, sparking considerable anxiety in a country where livelihoods are heavily reliant on agriculture. New Zealand's government approved the sale of 16 dairy farms to a company controlled by the Shanghai Pengxin Group, run by wealthy property developer Jiang Zhaobai. Pengxin hasn't revealed how much it is paying but says its total investment will be more than 200 million New Zealand dollars ($164 million). [Source: Nick Perry, AP, January 27, 2012]
New Zealand's center-right Prime Minister John Key has defended the sale, pointing out that less than 1 percent of the country's farmland has been sold to foreign investors. The central North Island farms bought by Pengxin came up for sale after a bankruptcy and total about 7,900 hectares (20,000 acres).
But nationalist voices have lined up against the sale, saying it will open the floodgates to foreign ownership. A consortium of local farmers and businessmen led by merchant banker Sir Michael Fay are taking legal action to try and stop or reverse the sale, which is due to close next week, in hopes they can buy the land themselves at a cheaper price."Our New Zealand farmers will never be able to compete with the overseas guys with deep pockets," said consortium spokesman Alan McDonald. "The government has just declared open season on our farms." Some commentators have suggested there is an element of xenophobia at play, after previous sales of New Zealand farmland to investors from the U.S. and Germany went ahead without much debate.
In February 2012, the BBC reported: A New Zealand court has blocked a move by the government to allow Chinese investors to buy farms in the country.China's Shanghai Pengxin was looking to buy 16 farms spread across almost 8,000 hectares in the country's North Island. Justice Forest Miller of High Court in Wellington has asked the government to reconsider its decision saying it had overstated the benefits. [Source: BBC, February 15, 2012]
A local farming consortium had appealed against the sale and offered to buy the land themselves. "We're very pleased with the decision from Justice Miller,'' said Alan McDonald a spokesperson for the consortium. "Our view is that Shanghai Pengxin never brought any real economic benefits to New Zealand."
Since the sale involves more than 5 hectares of land and is valued at more than 100 million New Zealand Dollars ($84m; £53m), it had to approved by the Overseas Investment Office (OIO). While the OIO had sent its recommendation for the deal, the court said that not all the criteria had been met. Justice Miller said none of the people involved with NZ Milk, the subsidiary of Shanghai Pengxin looking to buy the farms, had adequate knowledge about the dairy industry, which he said was a prerequisite to approving foreign investment in the sector. He added that since the farms were not in the best of the condition, any potential buyer, foreign or domestic, was likely to bring the same benefits of capital investment and improved productivity.
Despite the ruling by the court, the Chinese firm said it was confident that the sale would go ahead. "Personally, for me, the ruling is a big surprise, I hadn't read the Overseas Investment Act in that way,'' said Cedric Allan, a spokesman for Pengxin. "We're still pressing ahead as fast as we can, and we're still confident we are going to get the final sign-off.''
Iceland Rejects Chinese Bid for Resort Land
In November 2011, AP reported: A Chinese entrepreneur's bid to create a vast nature retreat in Iceland was turned down by the north Atlantic island nation's government, amid concern the deal would have handed a major chunk of territory to a foreign investor. Iceland's interior ministry said it had rejected an application by the Zyongkun Group, a company controlled by Huang Nubo, a 55-year-old former Chinese government official, in part because no foreign buyer had ever bought so much land in the country. [Source: Associated Press, November 25, 2011]
Huang, one of China's wealthiest entrepreneurs, had sought to buy 120 square miles of land on the north shore of Iceland in a deal which would have been worth about 1 billion Icelandic kronur ($8.8 million). He had hoped the site in Iceland's northeast -- which would have represented about 0.3 percent of the island's land mass -- would attract about 10,000 guests a year and create scores of new jobs. Iceland's Prime Minister, Johanna Sigurdardottir, had previously said she would welcome Huang's investment, particularly as the nation recovers from the collapse of its banking industry in 2008.
Since its financial meltdown, Iceland's economy has begun to recover -- with the International Monetary Fund predicting economic growth of 2.5 percent in 2012, far better than its struggling European neighbors. However, the interior ministry confirmed it had ruled it could not lift the country's strict restrictions on the purchase of land by foreigners to allow the deal to go ahead.
"The ministry believes that it's not possible to look past how much land the company wanted to purchase," it said in a statement. "There is no precedent for land on this scale being sold to foreigners."Referring to Iceland's law on land sales, the ministry said "it was considered necessary to limit foreigner's rights to property in Iceland to protect Iceland's independence" and to ensure that Icelandic people -- rather than foreign investors -- are able to benefit from the country's resources.
Some critics of the proposed deal had raised concerns that allowing Huang to purchase the land could give China a strategic toehold in the Arctic Circle, where nations are scrambling to claim natural resources and melting ice caps are expected to eventually open up new, faster global shipping lanes. Huang previously rejected those claims, and insisted that he planned the Icelandic site to be among a chain of nature resorts in China, the United States and Scandinavia. Halldor Johannsson, Huang's representative in Iceland, said he was surprised by the government's rebuff and claimed Icelandic law did not include limits on the size of a parcel of land an investor could purchase.
Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Yomiuri Shimbun, The Guardian, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.
Last updated April 2012