Hooked on land sales

Mainland cities, addicted to the money they raise by selling land to developers, are undermining the central government's campaign to contain housing costs.

Residential land deals in mainland cities, measured by area, rose 26 per cent year on year in the first eight months of the year, according to China Investment Securities. The average price per square metre jumped 43 per cent, pushing proceeds up 80 per cent to 816.5 billion yuan (HK$1.03 trillion).

Local officials rely on revenue from the sales to repay debt, especially as economic growth slows. Developers bid up prices because demand from homebuyers remains strong. The cycle is driving property costs higher, complicating Premier Li Keqiang's task of preventing social unrest over the lack of affordable housing amid a massive urbanisation programme.

"If the momentum in the land market can't be cooled down rather quickly, it's actually a fairly dangerous signal," said Bei Fu, Standard & Poor's Hong Kong-based property credit analyst. "Should it keep heating up, we're worried there might be further policy tightening, and there could be consequences for the entire market that are unpredictable at this point."

The central government has been trying to cool the housing market since April 2010, following a 14 per cent jump in new home prices the previous year. The most recent curbs, introduced in March by Li's predecessor, Wen Jiabao, included higher down-payment requirements and interest rates for second-home mortgages in cities with "excessively fast" price gains. Thirty-five cities set price-control targets, mostly capping increases at the growth rate of local incomes.

Li has not taken additional steps as he seeks to rein in prices without hurting economic growth, which has slowed to less than 8 per cent for five consecutive quarters. At the same time he has championed urbanisation as a "huge engine" of the mainland's future economy, a campaign that requires affordable housing for the millions of people moving from rural areas to cities.