China’s runaway house prices may ease as centralised land sale forces developers to curb spending spree

Developers will be forced to rethink their acquisition plans as land will be sold only three times a year under the new system
Land sales in China rose 15.9 per cent last year to 8.4 trillion yuan (US$1.3 trillion), with many plots fetching record prices

China property

Pearl Liu

Published: 7:30am, 10 Mar 2021

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Home prices in China that have risen for 35 months in a row could ease following the newly adopted centralised land auction scheme across major cities in the country.

The move will prevent developers from going on a land buying binge because land will be sold only thrice a year under the new scheme, market observers said. Most of the heavily indebted and cash-strapped developers are likely to consider using their funds judiciously and this would eventually drive home prices down, they added.

“The centralised scheme will make developers more rational as you have to pay huge deposits if you want to acquire a lot of land in one of the three auctions,” said Cristiano Cui, managing director of mainland developer Modern Land (China). “This will force developers to only go for the most desired parcels of land and drop out of the other auctions.”

The central government is standardising the auction of land usage rights by local authorities, eschewing the current random process where municipal or provincial governments can call for tenders – and compete with each other – whenever they need to plug a revenue deficit.

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As many as 22 city governments including Beijing, Shanghai and Shenzhen will abide by this schedule, according to a notice by the Ministry of Natural Resources in February.

The new system presaged further tightening measures unveiled by Premier Li Keqiang, who signalled more efforts were in store to steady home prices. Last week, China’s top banking regulator Guo Shuqing also expressed concerns about a bubble in the domestic property market.

Analysts said that such a policy on land auctions would constrain developers’ capital use.

“Earlier, small developers used to rely on additional borrowings or home sales to supplement their cash balance and take part in land sales throughout the year,” Dai Zebin and Wang Jianbo, analysts with CIB, said in a recent research note. “But now they have to be more cautious on how they use the money at hand instead of blindly buying a lot of land.”

Land sales in China rose last year despite the Covid-19 pandemic, with many plots fetching record prices. Total land sales jumped 15.9 per cent last year to 8.4 trillion yuan (US$1.3 trillion), while the average price rose 11 per cent to 2,653 yuan per square metre, record highs on both counts, data from the ministry of finance and property intelligence provider CRIC China showed.

A residential land parcel in Shenzhen sold for a record 11.6 billion yuan last May, topping the reserve price by 45 per cent after 16 developers made more than 100 rounds of bids. In Zhuhai, China Overseas Land and Investment beat 10 competitors to acquire a residential and commercial plot for 10.5 billion yuan in November, making it the most expensive piece ever sold in the city.

“We are hoping to see less fierce competition for land. Land prices and eventually home prices will be curbed,” said Li Jun, executive director of mainland developer Greentown China Holdings.

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The average price of a new home across 70 cities advanced 6.3 per cent in January for the 35th consecutive monthly increase, according to data by the National Bureau of Statistics, used as the national benchmark. Price have risen fivefold over the past 20 years.

The Chinese government is anxious to prevent any grievances on housing affordability from spilling over into social instability, as it grapples to keep the economy growing amid the pandemic.

“We will keep the prices of land and housing, as well as market expectations stable,” Premier Li said in his annual work report to China’s legislature in Beijing last week. “We will address prominent housing issues in large cities [and] make every effort to address the housing difficulties faced by our people, especially new urban residents and young people.”

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