Friday 8 January 2010
Beijing bid to cool property prices ignored
Mainland property prices have increased more than threefold since housing reform was instituted in 1998. Fuelled by an economic boom, income growth and limited investment channels, buying a home became a sure bet for most mainlanders even though the government repeatedly brought in tough measures whenever the market showed signs of overheating.
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Beijing bid to cool property prices ignored
Sandy Li
31 December 2009
At 80, sprightly Ho Sau is not yet ready to call it quits as a property investor. And she is not fazed by Beijing’s recent threats to clamp down on the mainland property market.
Striding into her favourite Hong Kong dim sum restaurant early one morning, she smiled as she told her octogenarian friends about how she sold for nearly HK$1 million a 500-square foot flat she owned in a 35-year-old dilapidated building without a lift in Tsuen Wan.
That she got such a tidy sum in return for a HK$60,000 investment she made more than 30 years ago appeared to delight her no end.
“I never expected to get this much from my old flat,” she said. “In Hong Kong, this kind of money won’t get me anywhere, but this will allow me to buy two small flats in Shenzhen.”
Ho said she knows people whose Shenzhen flats have risen 20 to 30 per cent in value this year. “They’re doing well and I can’t see why I can’t make money myself. I can’t be bothered by noises by Chinese officials about housing price controls. All I know is there’s money to be made in Shenzhen.”
Like Ho, many other investors from Hong Kong and the mainland take a bullish view of the mainland’s housing market. They appear oblivious to the wide array of steps Beijing has already taken to rein in soaring prices, and to the spate of recent warnings to adopt more control measures.
This seemingly irrepressible optimism is bolstered by an average rise of 30 per cent in housing prices since January in major mainland cities, as well as record high prices fetched last week in government land auctions in Shanghai and Guangzhou.
In Shanghai, China State Construction Engineering Corp bought a high-end residential site in the city’s Xin Jiang Wan Cheng district for 3.72 billion yuan (HK$4.22 billion), or 32,484 yuan per square metre. The deal marked the highest unit price paid for a mainland plot of land.
In Guangzhou, a consortium of three mainland developers, including Guangzhou R&F Properties, paid a record 25.5 billion yuan for a single plot of land.
The record prices came just days after fresh warnings by Premier Wen Jiabao and other senior officials about overheating in the property market.
So, what is going on? Why are the official pronouncements, even warnings, being ignored?
Analysts say there is an undeclared tug of war going on between Beijing and local governments that partially accounts for the continuing rise in housing prices and land values. They say Beijing has adopted policies that unwittingly help drive up housing prices.
Further fuelling the housing market are wealthy state-owned enterprises that move part of their excess funds into property in an attempt to bulk up their profits.
Analysts say that - even more than a housing supply and demand imbalance - the rift between Beijing and local governments is primarily to blame for the continuing cycle over the past two years of housing price increases after rounds of price controls.
Provincial officials dutifully comply with Beijing’s directives to cool prices when the property market is overheated.
But soon after the hue and cry dies down, provincial governments get back to the business of finding the money to finance infrastructure and other projects needed by their constituents.
With little funding support from Beijing, provincial governments have to fend for themselves. Since land sales are often their primary revenue source, they are left with little choice but to turn to them for their funding needs - with or without Beijing’s official blessings.
“I can’t imagine local officials passing off a chance to raise more than 25 billion yuan in revenue in just 40 minutes,” said Royal Bank of Scotland’s head of regional property research, David Ng, referring to the land auction in Guangzhou last week.
“They will certainly sell as much land as they can during their tenure rather than leave prime sites to their successors,” he said. “There is no replacing land sale revenue in the short term. There has been off-and-on talk on the need for local governments to broaden their revenue sources, through tax reform and other measures. But I believe this is a long shot.”
Ng estimates that between 30 to 50 per cent of local government revenue comes from land sales, and any move by Beijing to curtail land sales inevitably hurts the finances of local government units.
Citing Hangzhou as an example, he said the city’s land sale revenue amounted to 71 billion yuan, accounting for 77 per cent of its total revenue of 90 billion yuan.
Lawrence Hui Wai-man, the chief financial officer at Shimao Property Holdings, says local governments rely heavily on land sales and stamp duty on property deals, as they receive little financial support from Beijing.
Last week, Beijing issued a directive that raises the down-payment requirement for land purchases to at least 50 per cent of the total price to curb speculation on development sites, a phenomenon which in turn pushes up home prices. The rest of the purchase price has to be paid within a year, or two years in special cases.
Hui says the new policy will hurt developers’ cash flow and the acquisition of development sites. But it will also undermine local governments’ revenue generation and their ability to fund infrastructure and other projects and foster economic growth.
“This policy move smacks of shooting yourself in the foot,” he says. Local governments would be put in a difficult financial position and their ability to promote economic growth would be affected.”
Hui also takes to task certain state-owned corporations for their role in driving up land values.
“Most of the sites sold at record prices have been acquired by state-owned enterprises. They have deep pockets, much deeper than those of developers,” he says.
In the first quarter of this year, most prime sites in Beijing were acquired by local state-owned enterprises even if property developments are not among their core business. The more prominent purchasers include the Beijing Urban Development Group, Beijing Capital Development Group and BBMG Corp.
Their interest in property is hardly surprising. Excess liquidity in mainland markets, fuelled by the government’s loosened credit and monetary policies, as well as its massive economic stimulus package, has enticed scores of state-owned enterprises to channel some of their excess capital into the property market.
Between January and June, state-owned enterprises beat developers by buying six out of the top 10 prime sites that were offered for sale in major cities on the mainland.
Peoples’ Bank of China data shows that a record nine trillion yuan in loans was extended between January and November to large state-owned enterprises to build more roads, bridges and other infrastructure projects to hasten the economic recovery. However, some analysts said a substantial amount of the new loans was used by state-owned enterprises to speculate in stocks and property on the mainland and in Hong Kong.
“There are conflicts of interest and divergent views [over the development of China’s property market],” says Xavier Wong, who heads research at property consultants Knight Frank. He says the performance of local government officials is often measured by their ability to generate revenue and create jobs.
Their fund-raising prowess also serves as a basis for their promotion.
“The property market serves as a major income source for local governments. They can’t be blamed for resisting Beijing-imposed austerity measures aimed at curbing housing price rises,” Wong says.
“When the economy and the property market are overheating, most local governments resist the tightening measures, as these will inevitably hurt their financial and employment positions.”
In contrast, local officials always support the central government’s stimulus measures. When Beijing announced a four trillion yuan stimulus package in November last year, local governments came up with proposed investment projects - requiring 10 trillion yuan - within 10 days.
Mainland property prices have increased more than threefold since housing reform was instituted in 1998. Fuelled by an economic boom, income growth and limited investment channels, buying a home became a sure bet for most mainlanders even though the government repeatedly brought in tough measures whenever the market showed signs of overheating.
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