State policies fail to address realities of property market
In the past few weeks you have probably read more than enough about the mainland property market - a government minister complaining of expensive apartments beyond his reach; Premier Wen Jiabao promising to cool down the market; Shenzhen and Guangdong confiscating undeveloped land; securities regulators barring developers from fund raising ...
Before you do anything with your investment portfolio, have a look at these two conversations.
The first one is the current hot topic among mainland netizens. It is supposed to be between Xiao Ya, a 20-something guy, and his future mother-in-law. Both live in Shanghai. Ya has been dating his girlfriend for six months and decided to ask for her hand in marriage.
Mother: Xiao Ya, we have only one daughter. Oh, how can I give our baby away?
Xiao Ya: I know I am very lucky.
Mother: So is the house ready?
Xiao Ya: I have a 100 square metre, 18th floor, two-bedroom apartment in Xi Zi Wan [an hour's drive from downtown Shanghai]. It is right next to the number 9 route.
Mother: Only two bedrooms? What if you have a baby? There won't be enough room for us to live in to help you with the child.
Xiao Ya: Well, I am not that well off. This flat already cost me 13,000 yuan per square metre.
Mother: A small flat is so uncomfortable. I am really concerned with my girl's well being.
Xia Ya: (silent)
Mother: Hasn't your family got any other apartment?
Xia Ya: There's a four-bedroom apartment near downtown. My parents are living there. I suppose there is also a house in Jiangsu. My grandpa used to live there.
Mother: Okay, let's be honest. My girl is not going to marry you free. We don't want her to suffer. Neither do I want to make your life very difficult. Her niece has found a husband who bought her a two-storey house in Kai Yuan Xin Dou [a 30-minute drive from downtown Shanghai]. It's quite nice and costs only two million yuan. Why don't you get one? I am not asking too much, right? Of course, it will come under my girl's name.
Xiao Ya: Perhaps she should marry Li Ka-shing.
Xiao Ya bid farewell to his love and walked out from the room, so the story goes.
The second conversation comes from a friend of mine who has been working for a developer on the mainland for the past five years. Let's call him Chen.
Every New Year's Day he makes a point of buying dinner for local officials. This year was no exception. Here, in an expensive but low-key restaurant in a coastal city, he is enjoying a bottle of red wine with a local cadre.
Official: So how's business?
Chen: Not bad.
Official: Congratulations! Everyone [in the property business] should have made some big money last year, right?
Chen: We owe that to the government stimulus and your support throughout these years.
Official: Good. With the fortune in your pocket, you should become supportive. Perhaps, you can be less aggressive with the pricing of flats in the upcoming sale.
Chen: You know how hard our life has been. The price reflects the cost. Everything is going up - the construction cost, the land premium ... Perhaps you can be more generous with the premium.
Official: We do not set the land premium. The market does. And we spend every penny on the building of the city.
Chen: You are so right. Our flats are also priced by the market. People just grab whatever is available.
Official: But developers have a role to society. A lower margin won't hurt, right?
Chen: Absolutely, we have always been socially responsible. It is an honour to be able to contribute to the building of this city and its job market. But I am not sure if you can say the same thing about the speculators. They will take whatever is left on the table.
Official: I see. By the way, is the sale licence of your next project due to be approved next month? I hope it goes smoothly.
Chen: Ah ... yes ... there is no need to hurry. We can hold the sale for some months if it helps.
Official: Great. You are supportive as always.
Another bottle of red wine was opened - this time a more expensive one, of course.
These are the day-to-day realities on the mainland.
Not the paper after paper of policies handed down from Beijing; not the statements made by state leaders on national TV.
Demand for houses is inflexible. All newlyweds are expected to have their own flat - not just any flat, but one that meets the rising social and economic aspirations.
And for every 120.56 men born after 1980, there are only 100 women of the same age, thanks to the one-child policy. A guy with no house has little chance in getting a bride and therefore a child - and being childless in China is still a sin.
On the supply side, every player - be it the local government, developers, private investors or state-owned companies who have showered with free loans from the banks - have little interest or incentive to bring down property prices.
The building of subsidised flats, or 'economic houses' as they call them, is the only way out. Beijing has been talking about this for a decade.
Given the increasing public lament of rising property prices, one would have expected investment in economic houses to have grown.
In fact, it has not. In 2000, 16.3 per cent of total building investment went into economic houses. In 2008, the ratio dropped to 4.5 per cent, according to research firm Gavekal. The target number of economic houses is seldom reached. By last August, only 24 per cent of investment planned for 2009 has been completed.
Why? There is simply no mechanism for the construction of economic houses.
First, no city has a public housing authority, that is, no official is solely responsible for the success or failure of the project. Second, there are few systematic subsidies for developers of low-cost housing.
So far, we haven't heard any serious suggestions on how to solve these two issues, but we have had administrative measures a-plenty.
Yes, more cooling policies will be announced in the months to come, but the result will at most be a few months of price and deal stagnation.
The yo-yo of mainland property prices is here to stay.