Reality Check: Chinese Developers Unconvinced By Housing Curbs

Reality Check: Chinese Developers Unconvinced By Housing Curbs

Created on Thursday, November 14, 2013 – 19:35 EST

BEIJING (MNI) – Signs that big city governments are finally ready to act to cool demand for housing in China haven’t fazed real estate developers, who still don’t believe the government has what it takes to bring order to the runaway property market. Some hope lies in signs the new Chinese leadership may be willing to institute fundamental reform of the country’s land use system to put the housing market on a more solid, sustainable footing. But the statement released following a key Communist Party meeting here shed little light on how much reform the government is willing or able to implement.The National Bureau of Statistics is due to report the latest official house price data on Monday (0930 local/ 0130 GMT). Prices rose 11.3% y/y in September, the fastest pace of increase since April 2010, according to a floor-space weighted average of prices in the 35 largest cities calculated by MNI.

Prices in some cities saw record, or near-record, gains in September, including Beijing, Shanghai and Guangzhou, where they rose an average 17.7% y/y.

Data from private research companies suggest house price inflation only increased in October, with Shanghai’s Soufun reporting that prices in China’s 10 biggest cities rose 15.7% y/y in October, up from September’s +13.9%.

In Beijing’s Mytown development, a good hour from the center even in light traffic, a 90-square meter, two-bedroom apartment was on the market for CNY3.5 million ($574,000) having nearly doubled in just two years.

“If we don’t buy now, it will be even less affordable in the future,” said Zhao Xiaoyan, a 28-year-old who works in luxury retail in the capital.

After months of silence, some cities are finally starting to tighten restrictions on purchases to rein in house price inflation. In recent weeks, Shenzhen and Shanghai have raised the minimal downpayment for purchases of second homes to 70% from the previous 60%.

But market players dismissed these moves, noting that Beijing increased minimum downpayments back in April and that didn’t stop prices rising well above the national average in September.

“These were just political gestures,” said Mike Zhang, regional deputy chief of a Zhejiang-based developer. “Local governments were forced to do this, particularly ahead of the party meeting.”

These measures couldn’t have much impact, he said, noting that 70% of buyers are paying in cash.

The Beijing government has since stepped up its attempts to rein in the market, announcing plans to offer 20,000 units of low-cost housing by year-end, priced at 30% below similar, neighboring properties. Supply will be increased to 50,000 units next year, it said.

The program will target low-income groups who are qualified for government-subsidized housing and the apartments will be allowed to be sold after five years.

For Shao Xiufeng, a 40-something taxi driver in Beijing, this presents the opportunity to get on the property ladder, though he’s concerned the program will be riven with the same corruption which has undermined similar government housing plans.

“The key is to ensure fair distribution, to avoid corruption and rent-seeking in the housing sector,” Shao said.

In early November, the Beijing government also started suspending granting sales licenses to projects priced above CNY40,000 per sq meter.

Despite these noises, developers aren’t convinced that this latest round of curbs have any more teeth than previous ones.

“If we don’t get sales approval this year, then we just wait till next year,” said Mr Kong, a marketing officer at a medium-sized developer in Beijing. “They are still on the old path when it comes to reining in rising prices and that’s already proven to be ineffective.”

The curbs may suggest cooling prices as 2013 draws to a close “but it only delays supply and depresses demand temporarily,” he said, warning that using land for low cost housing may only serve to drive up prices outside of government-subsidized programs.

The answer to China’s distorted housing market is increased supply and changing expectations among buyers, such as by offering alternative asset classes to park their money in.

The conclusion of the third plenum of the Communist Party’s 18th Central Committee didn’t provide any indications of appetite at the top to take on the housing market.

The communique, which marked the end of the four-day meeting, said the party will unify the market for urban and rural land and increase the property rights of rural residents, but even the few details provided missed the market’s low expectations.

The government is still debating whether to expand its nascent property tax, even though it has publicly stated that it will do so, MNI understands. An important bone of contention is that expanding the tax would affect government officials and their families, some of whom have amassed sizeable property portfolios as the market has boomed.

News that Anhui province will start allowing farmers to sell or lease their land under a pilot program has raised hopes for progress in other areas, though nothing will be fast enough to tackle China’s lust for housing.

“It’s just the first step in a long march,” said an executive with a Hunan province-based developer. “This won’t happen overnight and, without an effective roll-out of a property tax, land revenue will continue to be important for local governments.”