The Root of China’s Soaring Real Estate Prices
[xtypo_dropcap]R[/xtypo_dropcap]ecent, sizable increases in Chinese land and real estate prices are believed to be a result of mistaken regime monetary policy, exacerbated by local Communist Party officials dipping their hands—often deeply—into the money pot.
Data from the China Research Index Institute (CRII) show that land and real estate prices in China have increased drastically this year. From Jan. 1 to Nov. 22, Shanghai's land sales totaled 137 billion yuan; Beijing ranked second at just over 100 billion yuan.
Local officials have multifarious ways of extracting rents from real estate transactions, including expropriating land from farmers, helping developers gain cheap loans, manipulating supply, and simple fuzzy accounting.
Land Prices Multiplied
Although China's official government policy has been to suppress real estate prices, it has had little effect. First Financial Daily published recent real estate data compiled by CRII that showed that although Shanghai and Beijing saw much higher sales values for land, the supply did not increase. In Shanghai, the amount of land sold was only six percent higher than the previous year. In contrast, the average price increased by 64 percent. Most of the increase is attributable to higher prices for commercial land. This year's average sale price of commercial land is 16,000 yuan per square meter, 114 percent higher than that of last year.
In Beijing, land sales exceeded 100 billion yuan for the first time on Nov. 19. The median price for residential real estate increased 56 percent from last year, reaching 8,559 yuan per square meter. Commercial real estate saw a doubling of price over the last year, reaching 9,874 yuan per square meter.
In the northern coastal city of Dalian, land sales this year to date total 89 billion yuan, nearly triple that of last year; the price of commercial real estate also tripled, while residential real estate grew in cost by two and a half times.
According to Guangzhou Daily, in the first three quarters of 2010, land sales in 30 cities in the region totaled nearly 900 billion yuan, a 70 percent increase over the last year.
Cash Flows to Governments
Local governments are so keen to sell land because of the fat profits it brings: part of the land sale revenue goes directly into their treasury.
“Land sales constitute a large part of local governments' revenue. This reality introduces a factor of unpredictability into the implementation of land policies,” Deputy Director Chen Baocun of the National Real Estate Managers Association said.
Guangzhou Daily quoted a developer saying, “People always say housing is expensive now. That's because half of the price is paid to the government for land.”
In a report submitted to the National People's Congress and Chinese People's Political Consultative Conference last February, the National Association of Industry and Commerce said that 41.2 percent of development costs are payments to the local government for land.
Although the government has been trying to control real estate prices, Chen Donghai, a Shanghai-based scholar, said that without land financial reform, real estate prices are unlikely to drop. The huge price increase over the last year shows that real estate policies have not touched the fundamental drivers of price change.
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