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China Moves to Curb Soaring Housing Prices

On May 30, the State Council, China's cabinet, took aggressive actions to cool off one of the hot spots in the country's rapidly growing economy, ordering measures to restrain soaring housing prices and to discourage real estate speculation.

Here are the most important steps listed in the Opinions on Readjusting the Structure of Housing Supply and Stabilizing Housing Prices prepared by nine central governmental departments, which are expected to be implemented nationwide on an order of the State Council:

• Tighter lending standards. No bank loans shall be extended to a housing project with capital fund accounting for less than 35 percent of the total investment, according to the Opinions, which nonetheless makes no mention of the previous level. Unsold housing space that has been empty for three years or longer is not to be used as collateral for housing construction loans.

• Higher down payments: Developers are required to charge down payments of at least 30 percent, up from the previous minimum of 20 percent. Families can still qualify for the 20 percent level for properties smaller than 90 square metres, provided that they are first-time home buyers and that the homes they buy are meant for their own use.

• Measures in favour of low- and medium-income families: Beginning June 1, not less than 70 percent of the land allotted to developers must be used for construction of homes smaller than 90 square meters, or "economy-class, affordable homes" in China's current business terminology. Likewise, developers are obliged to use not less than 70 percent of the land allotments they have received for construction of so-called "economy-class, affordable homes." The Opinions also calls for increasing the supply of low-rent housing––homes subsidized by local governments, which are meant for families living below the poverty line.

• Measure to discourage the construction of "luxury" homes: In accordance with the Opinions, the Ministry of Land and Resources has reaffirmed a ban imposed three years ago on the construction of new villas. In a statement published on May 31, the ministry urged local governments across the country to "immediately halt" the approval of land allotments for villa construction, though it is yet to give a definition to the word "villa."

• Measures to discourage speculation on the property market: Beginning June 1, owners who sell a property less than five years (the previous level was two years) after purchasing will have to pay a 5.5 percent business tax on their proceeds.

The Opinions, which is in fact a government directive, was prepared jointly by all the nine regulators involved, in one way or another, in real estate development. Among these were: the Ministry of Construction, the watchdog of China's construction industry; the National Reform and Development Commission, the country’s highest economic authority; the Ministry of Land and Resources, the authority for land allotments; the People's Bank of China, the country's central bank and supervisor of all commercial banks; as well as the China Banking Regulatory Commission and the General Administration of Taxation.

"This sheer fact testifies to the top authorities' resolve to restore order on China's real estate market," Professor Yan Jinming, an expert in land management at the People's University of China, told Xinhua, China's state news agency.

Gap between the Rich and the Poor

Yan and other experts see the latest move by the State Council as a vital part of its effort to rein in the economy, which has galloped along at about 10 percent growth for each of the past three years. In April, the government called for renewed efforts as investment in housing, factories and other fixed assets rose, prompting fears that banks were lending carelessly and could end up with bad debts.

Yan said, "It (enforcement of the Opinions) comes as a measure for macroeconomic control, to ensure that the China's economic growth will be sustainable."

Housing prices have been a particular concern for the government and people. Their rapid climb, as a matter of fact, is touching off resentment among the working-class Chinese and widening a politically volatile gap between China's rich and poor.

The government said housing prices rose by an average of 5.5 percent in the first three months of this year, compared with the same period last year. But in some areas the increases were much greater. In Huhhot, capital of the Inner Mongolia Autonomous Region, the year-on-year rise was as high was a staggering 24 percent. In Beijing, the national capital, housing prices averaged 7,046 yuan per square metre in March, up from 6,687 yuan in January.

"In 2003, homes in Beijing were sold, on an average, at 4,456 yuan per square metre," reported the Beijing Modern Business Newspaper. "Prices have grown by 60 percent over the past three years, and, since June 2005, Beijing has led the nation in the rise of housing prices."

When the Soviet-style planned economy held sway, most housing was distributed by "work units"-factories, schools, research institutes, government offices-to their employees as a fringe benefit, based on the seniority and rank of each, and the rent was nominal as wages were generally low. But, as the national economy has become increasingly market-oriented under the country's reform-and-opening policy, this old practice has been done away with and the government encourages private home ownership. A surge in construction has fuelled social strains as farmers and factory workers are evicted from their relatively inexpensive dwellings to make way for luxury apartments and walled villa compounds for an elite and small middle class who have benefited most from the economic reforms.

"It would be impossible for China to build a 'harmonious society' if housing is beyond reach of most Chinese," Professor Yan said. "We can't afford to take lightly the psychological effect (caused by the glaring gap between the rich and the poor) on the average Chinese worker."

In Beijing, in early 2006, an average industrial worker earned somewhere between 1,500 yuan and 2,000 yuan a month, and a white-collar worker at a foreign company, about 5,000 yuan. An apartment of about 70 square metres is now priced at half a million yuan at least.

"That is my salary for 200 years," said Yang Xin, who earns 2,500 yuan a month working for a Web site in Beijing.

Wang Xian, 26, is fortunate; he has a job. There are tens of millions in China who don't; they have to count on a meagre allowance provided by local governments for a minimum standard of living. Theoretically, low-rent housing projects come as an extra governmental subsidy for city people living in dire poverty. In practice, however such projects are simply non-existent in numerous cities, Xinhua reported, but without naming them.

Prices Soar––Why?

Factors affecting soaring housing prices are so interlocked as to prompt one to ask the time-honoured question: "Which came first, the chicken or the egg?" But two major factors affecting the current situation may be pinpointed by piecing together bits of information published in the Chinese press:

Local governments are to blame. A ban on the construction of luxury housing villas, which was called for years ago, has been largely ignored. So was a call to build "economy-class," or affordable homes and to launch low-rent housing projects. In Huhhot, average housing prices averaged 1,590 yuan per square metre in 2004. In just two years, these prices nearly doubled, to more than 3,000 yuan per square metre. According to Xinhua, in a bid to "modernize" the city, which lies in a relatively underdeveloped region, the local government allotted the bulk of the land earmarked for construction to developers of high-class, expensive housing projects, and there is hardly any room for "economy-class, affordable" and low-rent homes even if developers were willing to build them.

The same problem is found in Beijing, one of the most developed cities in China.

According to the Beijing Modern Business Newspaper, 279 housing projects were on sale during the first quarters of 2006, and 54 of these were priced at more than 10,000 yuan per square metre, and 41 at 8,000–10,000 yuan per square metre. The newspaper estimated that these "high-class" homes were responsible for 15 percent of the housing price hikes recorded since last year.

Under the Chinese Constitution, land, as well as all other natural resources, belongs to the State, to the "entire people," but may be allotted by the government to developers and construction contractors for a so-called "land-use fee." According to a report on http://www.nmgnews.com.cn, the government Web site of the Inner Mongolia Autonomous Region, the land-use fee collected in 2003 by land and resources bureaus across the country amounted to 300 billion yuan. The collection shot up to 550 billion yuan in 2005, and just in the first quarter of 2006, 300 billion yuan was collected. "Needless to say," the report noted, "the money paid by developers for land allotments is counted as a part of the housing construction cost. In the final analysis, it's home buyers who pay for the cost."

Profiteering and speculation in the property market is another major driver of housing prices. Hoarding and cornering of homes and construction space by developers are common occurrences. Unscrupulous developers often release false information to whip up panic buying. As housing prices keep soaring, there are rich people who buy homes to sell in the future when prices are even higher. According to local press reports, numerous expensive houses in the Central Business District and other areas in Downtown Beijing have been sold to millionaires from Shanxi Province. Most of these people are coal mine owners. One unidentified Shanxi mine owner reportedly bought a dozen houses that cost up to 3 million yuan each in the second half of 2005. Shanxi Province is famous for the largest coal reserves found so far in China. It is notorious for a string of explosions and other coal mine disasters in recent years, killing hundreds of miners. A ton of coal can be sold at 250–300 yuan, but the cost of producing it, according to Xinhua, is about 50 yuan at the most.

"Prices Likely to Continue Rising"––Expert

Professor Yan welcomes the Opinions on curbing soaring housing prices. "At least we can be safe to say that the government is now business-like in fulfilling its pledge to protect the interests of the average Chinese people," he said.

Meanwhile, he wonders whether some of the measures listed in the Opinions are scientifically based. "There is no statistical support for many things; for example, the decision to oblige developers to use at least 70 percent of the land for building of 'economy-class, affordable' housing," he said. "Besides, what is the scientific basis for the government to encourage the building of homes smaller than 90 square metres?"

Yan and other experts also noted that there are no legally viable definitions for formulations like "villas" and "economy-class, affordable" housing. "What is a villa?" he asked. "Without a clear and legally viable definition for the term 'villa,' developers may continue building villas and pass them off as things like townhouses."

"The government must not stop at publishing the Opinions," he continued. "Instead, it should undertake painstaking investigation and study and publish a set of regulations on implementation of the Opinions."

Developers, on their part, seem to have taken the latest government move with a grain of salt. "The Opinions fail to take any account of the differences between large cities and small cities, and between the relatively developed and underdeveloped regions," said Wu Kunling, deputy general manager of Beijing Shibo Land Development Company, Limited. "Can metropolitan centres like Beijing and Shanghai be put on par with a small city in China's West?" In his opinion, it’s good for the government to encourage the building of smaller homes but, he insisted, the market supply and demand in different places should be taken into full account. "In other words," he said, "the two '70 percent decisions' should not be implemented rigidly, and 'flexibility'should be allowed."

A real drop in housing prices is what potential home buyers want to see. Yang Xin, who is going to marry, wants to buy an apartment somewhere near the south section of the Third Ring Road, but prices there, averaging 7,000 yuan per square metre, have deterred him from buying. "Measures listed in the Opinions can't work overnight," he said. "My dream of owning a home will have to continue."

According to an online survey by www.sina.com, a news Web site based in Beijing, more than 60 percent of the respondents share Yang Xin's view, and nearly 60 percent say that the latest government order for building more homes smaller than 90 square metres is "too mild" for achievement of a real cut in housing prices.

To the question "whether you are to change your purchase plan because of the order for a raise in down payment, the answer is "no" from close to 60 percent of the respondents. In a report on the results of the survey, Xinhua quoted Zhang Yanwen, an expert of finance at the Chinese Academy of Social Sciences, as saying that the Opinions is meant to show the government’s policy preferences with regard to real estate development, not for immediate results in price cutting. "Given the size of China and the complicated nature of the problems," he cautioned, "housing prices are likely to continue rising over a period to come."

For people like Yang Xin, there seems, however, to be a ray of hope. Xinhua has reported that the authorities are considering a ceiling on housing prices, though giving no details such as when and how this will take place. "I hope the day will come soon,"Yang Xin said.