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Bubbles from 'stir-frying' houses By Yi Xiangrong (China Business Weekly) Updated: 2004-05-12 16:33
China's real estate market has undergone many changes in recent
years.
In that time, a group of property speculators from Wenzhou, in
East China's Zhejiang Province, has emerged and is attracting a lot of
attention.
Disputes and doubts
The well-financed
group usually buys a lot of houses at one time, and sometimes several buildings
or houses in one area, and then sells them at higher prices. Wherever the group
goes, local house prices skyrocket.
Their buying is not limited to Zhejiang Province, and they have
purchased a considerable number of houses in major cities such as Beijing,
Shanghai and Shenzhen.
Various opinions have been formed about the house
buyers.
Some look down upon on them. They maintain the groups are no more
than speculators who are manipulating the local real estate market, making very
good profits and creating a bubble in the economy that is expected to break
eventually.
Others, however, think highly of them. In their opinion, they
think the real estate market will be pushed forward, and GDP (gross domestic
product) and tax could be increased as well.
Although the pros and cons
do make sense, none is not grounded on the assumption that the domestic real
estate market is well developed, with clear title and open
competition.
Given such a background, who dares say that these activities
which I may term "stir-frying" are not legal?
However, how about China's
real "real estate market"?
Is the market perfectly legal? Is it fair
competition? Who may possess land? Who takes the leading role in growing land
prices? Who gets the eventual profits? Who are the victims?
Price rigidity
The present domestic real estate
market is monopolized instead of being well-developed and competitive.
Basically, any enterprise that wishes to become a player in the real
estate market is required to own land.
Suppose that the land market is a
normal, public and transparent one, then the government could provide lands in a
continual and moderate way, and so balancing supply and demand.
Revenues
obtained from land sales could be managed well by the government, thus
preventing land sellers from making exorbitant profit.
However,
traditionally selling and buying land in China is done through private contract.
Only a few cities, such as Guangzhou, use auction or bidding.
Over
the nine months starting from the issue of the Ministry of Land and Resources
national No 33 circular in 2002 relating to land to the similar Beijing
government's No 4 circular in February this year, the amount of land sold
through contract in Beijing equalled that of the land used for housing during
the 10 years before the issue of the No 33 circular.
Therefore, land is
being monopolized by group or individual real estate developers, enterprises
sharing common interests with the governments, or those with special
backgrounds.
The contract method destroys market-driven price
mechanisms, making it possible for "unqualified" developers to easily buy great
amounts of land and make very good profits.
Furthermore, some local
governments, for the purpose of expanding local financial revenue, limit local
land supply, thereby speeding up the imbalance between demand and
supply.
With such a background, there are only a few developers who may
enter the real estate market. When demand exceeds supply in the market,
developers are under no pressure.
However, as demand falls short of
supply, there is fierce competition among developers, and house prices go down,
not the result the developers expect or want.
As a result, motivated by
keeping the prices of houses high and by making greater profits in the real
estate market, the developers have colluded about house prices following a
so-called leader-oriented rule.
That is, the developer who first entered
into the market has the right to set the price, and successors can do nothing
but follow it.
If anyone initiates a drop in price, the others combine
forces to attack him.
Apart from that, as the developers always
anticipate increasing housing prices, the consumers are misled and
manipulated.
People even raise doubts about the quality of houses sold at
lower prices.
The collusion on prices advances the monopolization of the
real estate market, making it possible for real estate developers to profiteer
and do harm to consumer interests.
Stir-frying
effect
As a result of large-scale buying operations, housing
prices in some areas are artificially inflated, which paves the way for
developers to make handsome profits.
Obviously, real estate developers
and Wenzhou purchasing groups mutually benefit.
In a recent survey of the
Top 100 Richest in China, those engaged in the real estate industry make up more
than 50 per cent, compared with only 6 per cent internationally.
What
domestic developers and stir-frying speculators get comes from what the
consumers lose.
As house prices are kept at a fixed high level, consumers
with low or medium income suffer greatly.
Those with mortgages are
loaded with the heavy burden of paying back a lot of money on time. Most
people, however, can hardly see any hope of buying their own
houses.
Therefore, speculation speeds up the growth of the gap between
rich and poor, arousing social disharmony and turbulence.
In such a
monopolized real estate market, those who make the biggest profits are
developers, especially those individuals or groups with special backgrounds, who
first buy land from the government at a low price, and then sell them on
higher.
The government stands next to the developers in terms of
profit.
By selling land, the government increases domestic financial
revenue.
Meanwhile, GDP together with tax have been fuelled by real
estate industry development. Banks play a third role. As house prices flare,
consumer welfare decreases.
Therefore, it is unreasonable to blame
house-purchasing groups. They are not the problem and it is misleading for the
public.
What is the essence of stir-frying?
First, stir-frying
increases the disparity of wealth. A few speculators make huge amounts of money
and most common people sustain great losses.
This runs counter to the
human-oriented values of scientific development advocated by the central
government of China.
Second, stir-frying can result in disastrous
consequences.
Generally, capital used for house purchases is accumulated
from domestic banks.
If something similar to the Asian financial crisis
of 1997 recurs, house prices will fall.
The rich from Wenzhou will
quickly turn to rags, and the speculators won't be able to pay back their loans.
Then banks will have to shoulder an enormous burden.
In conclusion, we
should not let the stir-frying continue.
The government should set
restrictions on stir-frying so as to normalize the real estate market. This
would alleviate the symptoms.
Furthermore, the government should
strengthen its supervision and issue regulations on land sales and prices as
well. This is really the permanent cure.
Notes: The author is an
economist with the Institute of Financial Research affiliated with the Chinese
Academy of Social Sciences.
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