Nanjing’s home price surge indicative of frothy real estate markets in China’s smaller cities
Reliance on land sales to fund municipal coffers has put local officials at odds with the need for price stability
Home prices in Nanjing, the capital of east China’s Jiangsu province, have shot through the roof at an unprecedented speed amid the central government’s easing measures designed to reduce the inventory of unsold homes.
New home prices in the city surged 31.5 per cent in the past year, according to official data, catching up with the torrid real estate markets in Shanghai and Shenzhen and even surpassing Beijing. Prices in the city jumped 4 per cent in June, reflecting 16 straight months of appreciation.
Although Beijing started urging city authorities to adopt differentiated policies to curb overly-rapid price gains, analysts say Nanjing and many other mainland cities have been reluctant to follow the guidance as they are heavily reliant on land sale income.
“Nanjing doesn’t have an inventory problem but the government took an one-size-fits-all approach which led to an overheated market,” said Luo Hao, research head at Centaline Property in Nanjing.
Luo said many speculators have jumped into the market in anticipation that prices would go up further, especially in the new district of Jiangning, which is set to be developed into a state-level high-tech industrial zone.
“More than 50 per cent of buyers in Jiangning are investors, many from outside Jiangsu such as Shanghai as they cannot invest [in second properties] in their home cities,” he said.
Nanjing is one example of many second and third-tier cities that saw sharp price gains, partly because municipal authorities in these cities did not want to cool prices as income from land sales is a major source of government revenue.
China has rolled out a slew of stimulus measures since late 2014 as a way to clear mounting housing inventories in smaller cities, including six interest rates cuts.
The efforts re-inflated property markets in bigger cities, with the upbeat sentiment spilling over to some second-tier and even third-tier cities where local demand is not so strong, raising concerns of a potential asset bubble.
Although Nanjing and Suzhou, the satellite city of Shanghai, imposed curbs to rein in overheated markets in the second quarter, experts say the measures show authorities don’t seriously want to cool down prices.
“The most effective way [to cool the market] is to tighten credit and raise taxes, and the government didn’t do either. Any superficial efforts would only push prices higher,” said Yi Xianrong, a professor at School of Economics, Qingdao University.
Still, Nanjing launched a new rule that limits the highest asking price of land in June. However, the rule cannot stop cash-rich developers from ramping up bids for premium land, as local housing prices continue to go higher.
Seven out of eight land parcels for sale in a public auction in July were unsold because they exceeded the price ceiling.
“The aborted bidding means future home supply would be tight, which instead fuels ‘panic buying’,” said Luo.
Nanjing is experiencing a tough transformation as its traditional economic pillars of steel and auto manufacturing face structural problems. Meanwhile the government is investing heavily in building eight new metro lines and high-tech zones in Jiangning, Luo said.
“The expense is so big the government has to rely on the sale of land for revenue,” Luo said.
Shanghai and Shenzhen introduced stricter policies on down payment requirements in March to rein in prices, a move that was not followed by Nanjing, Suzhou, Hefei and other lower-tier cities with heated real estate markets.
“Smaller cities face more problems in government debt, and what they can do is push up home prices so that they can sell plots at a higher price to make up the loophole,” Yi said.
Proceeds from residential land sales in 300 key cities tracked by China Real Estate Information Corp rose 53 per cent in the first half of 2016 on year, reaching 846.6 billion yuan.