The uncomfortable truth in China's property market


By Xiaoyi Shao and Koh Gui Qing

BEIJING, Nov 6 (Reuters) - In defying four years of officialcooling efforts, China's soaring house prices reveal anuncomfortable truth: government is one of the biggest obstaclesto the success of taming the market.

State income is so entwined in the need for rising landprices that policy efforts to try to curb the house marketcreate an inherent conflict of interest.

With one hand on a patchwork of controls aimed at tamingrecord house prices, governments with their other hand are atthe same time selling land to developers at rising prices.

Homes in cities such as Beijing are more expensive by somemeasures than Britain or Japan, a dismal outcome for a centralgovernment campaign aimed at making homes more affordable toChinese. House prices in September rose nationwide at theirfastest pace in three years.

"The starting point of local governments is to keep landprices relatively high," said Zou Xiaoyun, deputy chief engineerat China Land Surveying and Planning Institute, a research unitaffiliated to the land ministry. "Governments are not willing tosee home prices fall."

Selling land is a major source of income for localgovernments but other factors drive up prices as well. Theseinclude natural demand from a rising population, and speculationfuelled by ready cash, given relatively few alternatives forinvestment.

China's reform efforts, such as lowering government relianceon land sales for revenue and providing speculators with moreinvestment options, should help iron out these factors. Ameeting starting on Saturday of the country's top leaders willgive clues about those reform plans.

Nowhere in China is the problem of a surging property marketmore acute than in Beijing and Shanghai, where the lure of goodeducation and employment have underpinned demand as millions ofChinese are encouraged to migrate to cities.

Beijing prices are the steepest in the country. A70-square-metre home costs 20 times annual household disposableincome, the International Monetary Fund said in a 2011 report,four times higher than in Britain and double Japan. Shanghai'sprice-to-income ratio is around 14 times.

Lu Biao, a 27-year-old IT engineer who works in Beijing, isbuying his first home in nearby Tianjin, a 30-minute expresstrain ride from Beijing. The 100-square-metre apartment willcost him about a million yuan.

"Beijing's home prices are too expensive and are alwaysrising," said Lu, whose annual income is around 150,000 yuan."If I don't buy a house now, I will never be able to buy one."


To be sure, the central government faces a dilemma. Risingdiscontent over house prices is a threat to the social andeconomic stability the Communist Party uses as justification forits one-party rule.

But the real estate sector is also a major economic driver,supporting some 40 other industries and generating about 16percent of the country's $8.5 trillion GDP.

That has been important this year in supporting economicgrowth, which is expected to droop to a 23-year-low of 7.5percent this year. And it is a major source of income for localgovernments, so if the central government clamped down too hard,it would cause problems for city authorities.

Beijing's government has sold 14.9 million square metres ofland in the first 10 months this year, more than during all of2012, Reuters calculations of official data show.

Its revenues from land sales have doubled to 120 billionyuan this year from last year's 65 billion yuan, thecalculations show. That's the fastest growth in at least sixyears and a boon when other sources of fiscal revenues arewithering.

Prices of new homes in Beijing rose 16 percent in Septemberfrom a year earlier, data shows, compared with the nationalaverage of 9 percent. Price increases were even steeperelsewhere; 17 percent in Shanghai and about 20 percent insouthern Guangzhou and Shenzhen.

"Land prices are rising so property prices will rise. Arising tide lifts all boats," said a senior executive at amid-sized listed property developer in Beijing. He declined tobe named as he is not authorised to speak to the media.

Beijing city authorities said they had taken severalmeasures to stabilise land prices, including increasing supplyand capping winning bids in land auctions, the Beijing MunicipalBureau of Land and Resources said.

"We have resolutely enforced central government'smacro-economy controls to maintain a healthy, orderly and stableland market in Beijing," the land bureau said in a statement toReuters.

Beijing's efforts are reflected nationally. The centralgovernment has waged a four-year campaign of restrictingpurchases, demanding higher downpayments and curtailing banklending to try to cool the market.


Nearly 80 percent of Beijing's new homes are being built in10 new towns on the edges of Beijing, consultant HomeLink says.

Typical is Daxing, an hour's subway ride south of the citycentre where apartment blocks are being built over formerwatermelon farms. Prices are soaring.

Apartments in the Gold Fragrance Town compound sold for11,000 yuan per square metre in 2010 after developers bought theland for 4,675 yuan in 2007, public records show.

Since then, prices have doubled. Apartments launched thismonth in the nearby Prosperous and Happy Spring estate, a jointdevelopment between Poly Real Estate and BeijingCapital Development Co Ltd, are going for 23,000yuan per square metre. The developers bought the land inSeptember 2012 for 7,070 yuan per square metre, public recordsshow.

Prices could double again. Poly and Beijing Capital jointlybought land in south Daxing in May at a record price of 18,870yuan per square metre, Chinese newspaper Securities Daily said.

Assuming land accounts for 50 percent of the final salesprice and allowing for a profit margin of around 35 percent,which developers use as a gauge, the apartments are likely tosell for at least 38,000 yuan per square metre.


Land prices are also rising elsewhere.

The Yiwu government in south China raised eye brows inOctober after it allowed a land auction to fail because thehighest bid missed its preferred price, Chinese media said.

Across China, governments' land revenues galloped 50 percentfrom a year earlier to 2.7 trillion yuan in the first ninemonths of this year, Finance Ministry data shows.

"Rising home prices are not uncontrollable, but they are notunder control," said Cao Jianhai, an economist at the ChineseAcademy of Social Sciences, a top state think-tank.

Chinese home buyers appear to agree. After waiting in vainfor prices to fall, many do not want to wait any longer,releasing pent up demand that partly explains September's spurtin prices.

In south Daxing, a retiree said she had waited since Januaryfor a good time to buy a flat for her married son. She nowthinks it is futile to hold back.

"It's not possible to wait. The longer you wait, the higherprices go," she said as she scurried between home showrooms.

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