Housing Prices Soar

Housing prices in Beijing surged by about 1,000 yuan (US$124.30) per square metre in the first two months of 2006, up 17.3 percent from the same period in 2005, according to the Beijing Municipal Construction Committee.

The rise took place despite the central government's efforts to curb mounting house prices in major Chinese cities.

According to a committee report, housing prices averaged 6,776 yuan (US$842.80) per square metre. Despite an average annual per capita income in the city of 17,653 yuan (US$2,195.6) in 2005, a historical high, local domestic incomes are still far too low to allow most housing consumers to participate in the housing boom.

 

Nevertheless, experts predict that housing prices in major cities such as Shanghai and Hangzhou will continue to rise, including Zhai Lujing, a researcher at the Beijing Urban Construction Research Centre, who told China Daily, "Housing prices in Beijing will rise steadily this year." Zhai's centre is responsible for conducting annual research report on the city's real estate market for the Beijing Construction Committee.

 

But, Zhai said some help may be on the way, because "rises will be smaller than last year thanks to tight government policies in the real estate market."

 

The price for ordinary residences averaged 6,721 yuan (US$836) per square metre in Beijing in 2005, according to a report made by Zhai's centre in early 2006.

 

Zhang Qunqun, a researcher with the Chinese Academy of Social Sciences, asserted that speculation by real estate developers, perhaps in connivance with some local governments, is suspected of propping up housing prices despite weak demand.

To curb speculation and rein in the red-hot sector, the government introduced stricter taxation policies last year and tightened land supplies.

The government began levying a 5 percent business tax last June on the full amount of a home sale, if the home is sold within two years of its initial purchase.

The central bank also ended a preferential policy for mortgages, raising the interest rate on such loans with terms of more than five years by 20 basis points to 5.51 percent.

Hoping government policies would rein in surging prices, many people have adopted a wait-and-see attitude on whether to buy a house.

"I want to wait two or three years," Zhang said. "Maybe prices might drop a little before I get married and need a house."

Because of this reluctance to buy now, fewer homes are being sold in Beijing. According to newly released figures produced by the Beijing Construction Committee, about 1.17 million square metres of commercial houses were sold in the first two months of 2006, down 24.5 percent from the same period last year.

 

Solid rise

Official statistics indicate that the transaction prices for future-delivery housing in Beijing climbed 24.7 percent year-on-year from January to September 2005.

But the surge mostly took place in the first quarter, and fluctuations became narrower after April. Home prices in September increased only 1.1 percent from August.

"The government initiated some restrictive policies at the end of March, and that had some repercussions in the market, especially on high-end properties," said Pan Shiyi, who built his reputation by offering ultra-modern projects in Downtown Beijing.

 

"But we see the market stabilizing in September, and I think even in the worst scenario there will be no drops in price or transaction volume in the near term."

 

His confidence was based on the sound economic growth nationwide and a situation involving the demand for housing in the capital city outgrowing the land available for development.

The situation is the same in other major cities. According to a survey conducted among 20,000 people in 50 major cities last month by the People's Bank of China, a record low of 18.2 percent of them have plans to buy private homes within the next three months.

That was a drop of 1 percentage point from the previous quarter and 3.8 percentage points from the same period a year ago.

The central bank said declines in Beijing, Tianjin and Shanghai were the most prevalent.

Industry insiders and analysts have said the rise in property prices has slowed (with only a few exceptions), and a bubble burst scenario is unlikely for 2006.

"The sector is falling within the government's targeted range for price stabilization," said Gu Yunchang, secretary-general of the China Real Estate Association.

Official data indicates that growth in property prices in 70 cities slowed in 2005 for three consecutive months, from 6.4 percent year-on-year in July to 6.3 percent in August, to 5.5 percent in September. The statistics are not updated frequently.

According to Gu, the real estate industry will remain a key engine in China's economy as it generates both consumption and investment booms. The challenge ahead, he said, is to make it healthier.

The government introduced measures last April aimed at curbing rampant growth in the sector. Measures vary from city to city and include capital gains taxes, depending on the length of a buyer's holding period, and the tightening of land transactions and pre-completion sales.

The measures have sent prices down in some cities that led the housing boom in recent years, such as Shanghai, and in a few towns in the neighbouring Yangtze Delta.

Prices in Beijing are rising moderately. In Shenzhen, one of the country's richest cities in terms of per-capita income, prices have become red-hot in the past several months, with robust buying.

Although the government's efforts to cool down the market are paying off, some say continued growth is hardly to be bridled.

"To understand the trend of the market you need to put the average statistics aside and look into the specific areas," Beijing's Pan said. "As far as the Beijing market is concerned, there is no way the prices will go down."

 

Contrarian Cool

Despite a buoyant outlook in Beijing and many other cities, some add a note of caution.

"Every industry has ups and downs, and the real estate industry is no exception," said Yi Xianrong, a senior economist with the Institute of Banking and Financing under the Chinese Academy of Social Sciences.

"Once the prices stray too far from the general public's purchasing power, the situation will reverse and even the wealthiest developer won't be able to escape."

For more than five years, China's real estate investment has been growing three times as fast as the growth in the gross domestic product, resulting in soaring steel and cement prices, a shortage of electricity, and fears that the economy will become overheated.

Leng Hongzhi of the Department of Land Use Management, Ministry of Land & Resources said, "The government will take measures to control prices…."

He said the government would continue to restructure land supplies and the land used for mid-low-level-priced aparments and affordable houses. Also, available land supplies will be increased. In April, 25 properties will be put onto the market dealing with habitable land. The government has adopted four measures for dealing with the land supply: increasing the supply where prices are increasing rapidly; adding to the supply of habitable lands for mid-low-priced aparments and affordable houses; halting land use for villas; and by strictly restricting the supply for high-end apartments.

He said the government also investigate the availability of vacant land and encourage real estate developers to speed up construction and incresase housing supplies for low to moderate income buyers.

 

Back to earth

The price components of housing in Beijing may be divided into several parts: the price of land; construction standard-costs; development profits and taxes. Land prices are about 20 percent-40 percent of the total price normally. Compared to the rest of the world's major capital cities, land prices in Beijing are not high. Standard construction costs are about one-third of the total, the largest part. Development profits account for about 15 percent of a sale, which is higher than average levels in the industry. Sites really can influnce the bottom line, according to the Ministry of Land and Resources, and the return-on-investment of Beijing is one of the highest in China, especially projects lying within the city's Second and Third Ring roads.

 

The consensus of many local developers and home buyers is that Beijing's property boom will remain strong until 2008, because the upcoming Olympics is sparking a serious facelift in the city's landscape, with new subway lines, highways, infrastural projects and other aspects of the Olympic economy leading the way. While these factors represent enormous business opportunities in the capital and elsewhere, they are also feeding the property value frenzy that seems to have no clear end in view.