All real estate markets are local, says the industry axiom, one that China’s central government is painfully aware of as its efforts to rein in home prices are undermined by uncooperative municipal authorities.
Former Premier Wen Jiabao, in his final endeavor to make housing affordable, set an April 1 deadline for higher down payments and interest rates for second-home loans in cities with “excessively fast” price gains and ordered stricter enforcement of taxes on sales. Thirty-five provincial-level cities responded with measures insufficient to curb prices that climbed 150 percent from 2003 to 2012.
“The local governments are just making a gesture to show they are following the orders,” said Ding Shuang, a senior China economist with Citigroup Inc. in Hong Kong. “Some of the targets are almost like jokes. The government’s enforcement of policies will be compromised.”
Local officials lack the resolve to cool the market because proceeds from land sales contribute about a quarter of their fiscal income and are needed to fund infrastructure and other spending. Their reluctance to act decisively poses a challenge to Premier Li Keqiang, who replaced Wen on March 15 and inherited rising prices that aggravate social unrest by putting homes out of the reach of many Chinese.
After a brief slowdown in the first half last year, sales jumped 53 percent in March from a year ago, government data released yesterday show. Prices for new homes climbed the most in more than two years from February, according to SouFun Holdings Ltd. (SFUN), owner of the country’s biggest real estate website.
Most cities, including Hangzhou and Nanjing in the east, and the southern business hub of Shenzhen, pegged home-price gains at a rate less than the growth in per-capita disposable incomes. That will allow home prices to increase 7.5 percent to 13 percent this year, Centaline Group, parent of China’s biggest real estate agency, said in a report this month.
Only Shanghai and Beijing, which already has the harshest curbs in the nation, were more stringent. Beijing banned single- person households from buying more than one residence while Shanghai prohibited banks from giving credit to third-home buyers, according to the local administration websites. The two cities will also enforce a 20 percent tax on capital gains from property sales.
The curbs in individual cities are “far more benign than the market’s expectations,” analysts at BNP Paribas SA in Hong Kong, led by Wee Liat Lee, said in an April 2 report.
The government started efforts to hold down property prices in April 2010. It has raised down-payment and mortgage requirements, imposed a property tax for the first time in Shanghai and Chongqing and enacted purchase restrictions in about 40 cities, including capping the number of homes people can own and requiring new residents of a city to wait a year or more before buying.
The government’s latest measures are unlikely to cool prices, though sales may slow, Yao Wei, a Societe Generale SA China economist, said in a March 26 report. Expanding the property tax and tightening monetary policy are two other options it may consider, she said.
Home prices resumed climbing in the second half of 2012 after the central bank cut interest rates in June and July to reverse a slowdown in the world’s second-biggest economy. They were the first rate cuts in three years. The economy expanded a less-than-expected 7.7 percent in the first quarter from a year earlier, figures released yesterday showed.
Imposing a nationwide property tax would be “very effective” in stabilizing the market, though it should be done gradually to avoid a crash, billionaire George Soros said in an interview with the official Xinhua News Agency on April 7.
“Theoretically, everybody knows a property tax is good, but practically it has been opposed by those who already own a lot of homes, including some officials,” said Citigroup’s Ding. “Even if the tax couldn’t be immediately imposed, a timetable will help affect market expectation.”
Prices are at the highest since China privatized home ownership in 1998 as urbanization drove workers into cities, raising incomes and boosting demand. Cooling the property market would weigh on land prices and sales, reducing a key source of income local authorities need to fund infrastructure construction.
“Fundamentally, there are problems with local governments’ incentive tendencies,” said Vincent Mo, chairman of SouFun. “They are reluctant to sell land at low prices because they live on land revenues,” restricting supply and making it difficult to bring home prices down.
The growth in revenue from the stamp duty levied on home and land transactions slipped 8.3 percentage points to 3.9 percent last year as sales slowed and developers became less willing to buy land, the finance ministry said in a Jan. 23 statement on its website.
Land sales dropped 13 percent to 1.8 trillion yuan ($290 billion) last year from 2011, according to SouFun, which tracks 300 cities. Land prices dropped 1.2 percent in 2012 from a year earlier to 942 yuan per square meter, SouFun said.
China’s cities, especially smaller ones, got at least 21 percent of their revenue, and in some cases as much as half, from selling land last year, according to Zurich-based UBS AG.
Local municipalities are also using land for financing, according to Credit Suisse Group AG. The municipalities, barred from directly selling bonds or taking out bank loans, have set up more than 6,000 local government financing vehicles, known as LGFVs, to raise funds for projects, the National Audit Office said in a June 2011 report. Such vehicles accounted for 46 percent of local borrowings.
“Due to stricter regulation on financing, these LGFVs are more reliant on land sales (and are using unsold land as collateral to borrow) than before,” Jinsong Du, a property research analyst at Credit Suisse in Hong Kong, said in an April 8 report. “This is probably the main reason for the much milder-than-expected city-level housing measures.”
The expansion in local government revenue this year is projected to slow to 9 percent from 16 percent in 2012, Moody’s Investors Service said in a report March 11. Land-sale income is forecast at 2.74 trillion yuan for this year, equivalent to about 26 percent of regional governments’ fiscal income last year, according to the finance ministry.
“The local governments are actually quite smart,” said Qu Anxin, a Shanghai-based senior manager at Centaline Group. “We’ve seen such situations where local governments will increase land supplies when the market was good and therefore get higher prices at auctions, and they become not so enthusiastic when the market is bad, and they would use land parcels with poorer quality for affordable housing projects as they won’t sell at high prices anyway.”
Local authorities’ thirst for land came to light last year in reports by the national auditor’s office. In an audit of 24 cities and counties’ land management and land-sale funds, seven regions -- including Tianjin, which neighbors Beijing, and Shenyang in northeastern China -- were found to have illegitimately seized 204,100 mu of collectively owned land, mostly from farmers, to skirt caps on the amount of land that can be used for new construction, according to an April 2012 statement on the auditor’s website. Mu is a standard Chinese measure for land that is equivalent to 666.7 square meters or 7,176 square feet.
New home prices rose for a 10th month in March, gaining 1.1 percent from February, the biggest advance in 26 months, according to SouFun, as buyers rushed into the market ahead of the property curbs by local governments.
Asking prices of existing homes in the first week of April continued to rise in four of five major Chinese cities that Centaline tracks.
“The new policy not only confused foreign investors, but also confused me,” Wang Shi, chairman of China Vanke Co. (000002), the nation’s biggest developer by sales value, said at a conference in New York on April 6. “They cannot only use temporary controls on prices” and should also limit increases “through market methods,” said Wang. He reiterated that there’s a bubble in the property market, a view he first aired last month in an interview on CBS Corp. (CBS)’s “60 Minutes” news program.
The government will issue more tightening measures if home sales and prices continued to climb in coming months, said Johnson Hu, a Hong Kong-based property analyst at CIMB-GK Securities Research.
Still, the nation’s weaker-than-expected first-quarter economic growth is alleviating further tightening concerns, Citigroup analysts Oscar Choi and Marco Sze wrote in a report dated yesterday. The data “points to the government’s dilemma since, if tightening in the property market is too stringent, this would impact growth,” they wrote.
In larger cities, such as Shanghai and Beijing, a shortage of land is underpinning price gains. Shanghai sold a 122,018- square-meter plot of land for 3.8 billion yuan on April 10, the highest price this year in the city.
“There’s a lot of land wasted in rural area, but a lack of supply in big cities,” said Ren Zhiqiang, chairman of Huayuan Property Co. (600743), a midsize Beijing developer of commercial and residential properties, on April 8 at the Boao Forum for Asia. “What ultimately pushes home prices to rise unceasingly is such unreasonable land distribution.”
One clear-cut nationwide property policy won’t work in country so big, according to broker Savills Plc. (SVS) Home prices last month in Shanghai hit 28,147 yuan per square meter, the highest among 100 cities SouFun tracks and almost seven times the lowest, in the central city of Xinxiang.
“The main impact of this round of the central government’s policies is to give local governments more independence in deciding how these regulations are implemented in their local markets,” said James Macdonald, head of China research at Savills in Shanghai. “With that greater power, they are also going to have greater accountability.”
--Zhang Dingmin and Bonnie Cao. Editors: Andreea Papuc, Pierre Paulden, Larry Edelman