Five months after the authorities launched rigid regulatory measures designed to deflate the housing bubble, China’s markets are experiencing active land sales with record high prices and quickly rebounding housing prices.
The residential housing price has risen 9.3 percent since August 2009 and the rate of increase is even steeper. In Beijing in September, for example, prices went up 76 percent from the first week of the month to the second week, a 267 percent increase over the same period last year.
Land trading has also become more active. The August revenue from land sales in China’s top ten cities reached 21.9 billion yuan (US$3.2 billion), a 2.3 percent increase over July. “Land Kings,” as the Chinese refer to land buyers paying record prices, reappeared after a short hiatus following the enactment of the regulations. In the first two weeks of September the land price record was broken in three cities: Guangzhou, Shanghai, and Wuhan.
Last April, Beijing’s housing authorities prohibited families from buying a second home, banned mortgages for the purpose of acquiring a third property, and limited mortgages to non-local residents. They also pledged to punish real estate developers who attempt to manipulate housing prices.
Apparently, the new policies are aimed at curbing the soaring price of residential property. In March, housing prices in China’s 70 major cities increased 11.7 percent over the same period last year, reaching a record high since 2005, when monthly housing price statistics first became available. In Shenzhen, a coastal city near Hong Kong, the price increase reached 95 percent, while in Beijing it was 88 percent.
Economist and housing market expert Dr. Liu Zhengshan told Voice of America that China’s housing bubble has reached a critical point by all standards, saying, “In cities like Beijing and Shanghai, the housing price is over 20 times higher than average annual household income.” “That means it takes an average family more than 20 years to purchase a home. In reality the number is even higher.”
Though it seems unusually strong medicine, experts say the new policy still failed to regulate the market forces that have the most impact.
While the new policies target speculative purchases by wealthy individuals, economists have pointed out that the housing bubble is inflated primarily by local governments, state-owned enterprises (SOEs), and banks.
The wrong focus of the policy makers led to the failure, said Dr. Liu, currently a research fellow at Peking University. Liu believes that the speculative land purchase binge that peaked in 2009 was a result of the $600 billion stimulus money the central government pumped into the market at the end of 2008. The majority of the amount, experts say, has been invested in the real estate market by SOEs.
These SOEs have become a dominant force in the real estate market. For quick financial gains 94 of the 129 SOEs have entered the real estate business. With substantial financial resources, the SOEs comprise the majority of the “land kings,” said a Guangzhou Daily report. Their spending has played an important part in driving up land and housing prices.
Though Beijing has required SOEs whose primary business is not real estate to withdraw from the real estate market, they only account for 15 percent of the market. The remaining 16 SOEs make their primary business in real estate, and they alone account for 85 percent of the SOE real estate business.
On the other hand, local governments are very eager to sell more land in order to meet the 8 percent GDP increase target set by the central government. Local officials’ performance evaluation is based largely on the region’s GDP number.
Lands for sale used to fill that quota are mostly expropriated from local residents, especially farmers, accompanied by numerous compensation disputes, forced demolitions, and violent evictions which often lead to casualties. In some of the more infamous cases, desperate residents have resorted to public suicide in protest.
Banks are another one of the stakeholders who do not wish to see declining housing prices. Economist Cao An said a 30 percent decrease in housing price will lead to an extra bad debt of over one trillion yuan (US$148 billion). “A plunging housing price will be the worst nightmare for China’s financial system,” he said.
Now, as long as the SOEs continue to purchase land from local governments at sky-rocketing prices, and banks continue lending to real estate developers, experts believe housing prices will keep going up.