Lost decade in China’s real estate market
On February 26, 2013, the General Office of the State Council promulgated the Circular of the General Office of the State Council on Continuing Regulation of the Real Estate Market (the "Circular"). The Circular reaffirms strict enforcement of the 20% individual income tax on profits derived from property sale. Profits from property sale have long been subject to the 20% individual income tax since 1993, but few property owners have actually had to pay the tax. Currently, such tax is waived for a property owner if the owner’s family has only one residential property for self-use and has owned such property for five or more years. The property owner may also pay an alternative tax of between 1% to 3% of the total sales price, if the owner does not possess or fails to submit property records that evidence the owner’s original purchase price.
This Circular is the latest effort by government to stabilize property prices and restrain speculation in the property market. However, this effort was once again not recognized by the public. In fact, though people have more complaints about the rocketing real property price, the governments at all levels were more and more indifferent toward the regulation policy to cater to these complaints, so why? Maybe the details of real property regulation policies in the past decade can tell the reason.
Four Separate Rounds of Property Regulation in a Decade
From the perspective of the growth trend, the property price followed the fast growth channel as from 2004, followed by the real property regulation policies from the government. According to the approaches of the regulation policy and the orientation, they can be divided into four separate phases.
Phase I: Warm-up Phase（2002- the end of 2004）. As early as 2002, Nine ministries and commissions jointly promulgated “Several Opinions on further strengthening the Macroeconomic Control of the Real estate market and Accelerating the Real Estate Market”（No. 217），specifying the macro control of the real estate market by emphasizing such aspects as the land supply, financial credit, housing structure, etc. 2004 was thus referred to as Policy Year for the real estate market and many policies were issued, mainly involving the land transfer models, qualification of the real property developers, loan conditions and currency policies, etc., to regulate the market and control the real property price.
The real property regulation in this phase was actually the macroeconomic regulation with the regulation approaches, mainly focusing on the investment control by increasing property and land supply. In spite of the real property regulation, it remained within the scope of the macro-control. The real property price crept up all along and the peak rise of the national real property price exceeded 10%.
Phase II: Structural regulation mix phase（Early 2005- early 2008）. In early 2005, the higher real property price became a social issue. The stringent regulation policy was characterized with the main approaches shifting toward the structural regulation, which could curb the overheated investment and also putting forward the new target for “stabilizing the real property price”，“Eight National Requirements”, “New Eight National Requirements”, “Six National Requirements” and “Fifteen Requirements” by laying emphasis upon the crackdown on the land hoarding behavior, improving the commercial building and guaranteeing the affordable housing supply structure, increasing the down payment percentage, issuing tax regulation means, improving the supply structure as well as initially adjusting the investment-based demand of the commercial building, etc.
However, after the promulgation of many “real property new deals” to “control real property price”, the real property price remains to shoot up. During a certain period, the real property price control policies were featured with the Pro-cyclical operation, and the actual effect was to aggravate the fluctuation range of the real property price cycle. In the real estate market in 2006 and 2007, the more rigorous the regulation policies, the fiercely faster rise of the real property price.
After all, as from the early 2008, the entire real estate market began to take a downtrend with the decreasing sale areas, which, however, should be attributable to the macroeconomic situations. In 2006 and 2007 more stringent real estate policies came into force just in 2008, further expanding the declining space of the real estate transaction volume.
Phase III. Purchase-stimulating phase （the end of 2008 to early 2010）. To cope with the deterioration of the economy, the “4-Trillion” economic stimulus package was issued in the second half 2008, and followed by the real estate stimulus policy. For example, when residents firstly purchase ordinary house, the deed tax rate temporarily decreases to the unified tax rate of 1%, and the stamp tax is total exempted; Personal housing accumulation fund loan interest rate would be reduced by 0.27 percentage point, etc.
In regard to the bailout program driven by the government support, the real estate market regained vigor with all incomplete or delayed buildings were totally sold out, which was rarely seen in Beijing in the past few years. The luxury Star-River Building in Shanghai obtained the sales amount up to 4 billion yuan. As from the second half of 2009, under the strong desire for speculation or vehement pursuit of the trend (“early birds catch more worms”), more and more consumers edged their way into the real estate market, thus caused “blow-outs” of the real property tie-ups and the real estate price jumped up as quickly as it could. In November 2009, the increase range was 15% more than the same period last year. In fact, in the new round of real estate price hike, the real estate price in Beijing, Shanghai and some other major cities witnessed the double of the price.
Phase IV: Full Administrative Intervention Period (Early 2010 up to now). After the New Year’s Day of 2010, the rumor about the central government’s intervention of the fast-rising real estate price heavily flooded to the market, followed by the “11 National Requirements” and the more historically rigorous “New 11 National Requirements”, restraint on real estate purchase by non-native residents（Property purchase restriction policy）, drastic increase of the loan interests rates for purchasing the second house coupled with other specific viable measures, all of which threw the brisk real estate market down into the ice cellar, thus resulting in the serious shrinkage of the real estate transaction volume. In 2011, the central government rolled out the plan for 36-million affordable houses. The differential regulation system, involving the land supply, credit, tax and affordable houses, etc., gradually took shape in China.
In early 2012, the real estate market remained stagnant. Beijing, Shanghai and other first-tier cities reached the rock bottom compared with the past few years in terms of the transaction volume and price of new buildings and second-hand buildings. Green Town “went broke” and the real estate trust risks and other negative news were frequently heard. Although experts raised their complaint about the rationality and legality of this round of real estate regulation policy, but we have to admit that these measure can curb the rising trend of the real estate price for the time being.
At this very moment, the market mentality began to change subtly as the rumors about the removal of the house restriction policy were repeatedly heard here and there. As a matter of fact, it was just at this moment that the sales area and price of the real properties began to rebound until the full recovery prior to the spring festival this year, so stricter regulation policy was initially predicted by many research institutions.
Who are so eager to rush to purchase houses?
In retrospect, Premier Wen Jiabao had the clear route map for the real estate regulation as the real estate market was actually an integral part of the macroeconomic period, so the real estate market should be subordinate to the overall situation of the economic period, which was more clearly manifested in the end of 2008. Then, in face of the complaint from the media about the rising real estate price, the real estate policy tended to shift toward the social policy. The government is in a dilemma as to how to make a better choice between the economic growth and the social stability, so the different policy packages issued by the central government were inconsistent, rendering it rather hard to for the market to follow.
However, the real estate regulation didn’t pay off with a satisfactory result. We will ask, how come that the real estate price stands up against the rigorous regulation policy?
Objectively speaking, the so-called rigid demand in the real estate market does exist and get bigger as the fast urbanization bringing more and more non-registered household residents into the cities. First of all, they have a strong desire to have their own houses, but due to the lack of the systems for the affordable houses, this part of demand can only be satisfied by the commercial building market. In addition, due to the binding of the household registration system and the commercial houses, the houses are kind of discounted in terms of the public product value, so a lot of employees of the collective household can be entitled to the public service after they can really purchase their own houses.
In the second place, there is the special purchase demand in the transitional period in China. To some extent, owning houses is the important symbol of social reputation and social status of a person. In fact, in view of the personal bank loans and credit rating, etc., personal real estate can be deemed as the vital reference frame of the individual credit (ability to pay). In contrast to the current marriage real estate demand in China, a big number of property purchasers just buy houses for marriage purpose in the cities, particularly forced to do so from the great pressure from the parents of the brides who are lacking the security to some extent.
With the downturn of the stock market and the lack of the proper investment channels, it represents the safest way to buy real property to hedge against the inflation and accumulate the wealth, particularly under the actual circumstances where the gains from the power-for-money deal and grey incomes takes the lion’s shares of the total residents’ incomes.
The rigid demand cannot be gone, nor should it be curbed except for the satisfactory supply of the affordable houses (to meeting the residential demand), sound credit system (the balance system for the personal credit and social status) or the end of the urbanization. Therefore, the control of investment demand and the expansion of the supply of the commercial houses will be the principal line of the current policy. And so is the fact but it is rather difficult to operate.
To curb the investment demand, it is necessary, first of all, to solve the problem as to how to identify who has the real rigid demand and who has the investment demand? In practical operations, the policy is always accidentally impairing the rigid demand. Whether the house restriction policy or the levying of the personal property transfer tax proves to be a total bore to the group of “Rigid Demand”. These policies can ultimately curb their desire for their own houses, so they will let go of their strong demand when the policy is relaxed to some extent.
Of course, we can take the means, say, the real property information disclosure to avoid these defects, however, due to the fact that the assets of the most real property owners are illegal or obtained from the grey channels and they have the stronger impact on the policy, so it is rather difficult to establish such systems as the national network real property registration information and the official Property Publicity, etc. The real property tax, which can effectively curb the investment demand for real property, can be faced with the same problem.
What is the real regulation objective?
Since the price control is extremely difficult, the most effective impact of the real estate price is the more supply of the commercial houses, particularly the land supply. The core of the matter lies here: the current land purpose control is the main reasons for the disorderly real estate market. Some typical cities like Beijing, Shanghai, Shenzhen and Hangzhou, etc., followed the land management system of Hong Kong in the land supply. The government monopolized the primary land market, artificially causing the shortage of the land supply to obtain the higher land transfer fees. Hong Kong seems to have the limited land supply but with the dense population, but the actual land use rate is comparatively low as more than 90% of the Hong Kong land is reserved in the name of greening and environmental protection. In the same token, the mainland China controlled the expansion of the urban construction land in the name of grain security and the protection of the cultivated land.
When we review the history of China’s real estate market, it was in 2002 that the real estate price began to shoot up during which the land and resources ministry released “Rules on the Assignment of State-owned Land Use Right by Bidding, Auction and Quotation (for Trial Implementation)” (No.11) to cancel the agreement-based land transfer method used many years. The then government abandoned itself from the roles of a supervisor but of a land market maker to expropriate farm land, dismantle and relocate the old cities at a lower cost but then resell the land to the real developers at a higher bid price. In the meanwhile, to restrict the land supply for the maximal benefits, the government is actual the largest beneficiary in the real estate market.
With the exploration in the past years, the low-priced industrial land that can attract the large industrial projects and can boost GDP and employment has become the residential income fast growth and the economic agglomeration, thus increasing the appreciated land value. Through the primary land monopolization system and the prior land purchase and reserve, the government can share a part of the land transfer fees for the public bidding. By using the land transfer incomes, the government can reinvest on the infrastructure to have a new round of industrialization and the introduction of the commercial projects.
Most importantly, this model can generate the tremendous interests. In recent three years, the land transfer incomes stably register at 2-3 trillion yuan each year, only second to the general financial incomes of the local governments, which means the monopolized income at the primary land market has become the major financial source of the governments. So if the real estate price drops, it will drag down the income of the governments, let alone the increase of the land supply, which is the thankless job.
As regards to the government incomes and the no end of complaints for the public, which is the priority? Under the current political system, it is easy to pass judgment. The government would rather spend money to build the affordable houses than cut off its own financial sources. Sure, it is something that can be easily cooked up by doing the superficial performances or just sailing under false colors. The construction of 36-million affordable hoses as from 2011 should cost at least 4 trillion yuan if the goal could be really achieved, which actually defy the practical operation.
According to the announced statistic data, during the period from 2009 to the end of 2011, more than 21 million affordable houses got started for construction, particularly the lease-based low-rent houses and public-rent houses accounting for 20% and 15% respectively; the renovated houses for the shanty ones accounting for 42%; the sale-based affordable houses and price-capped houses accounting for 17% and 6%, so we just wonder: should all these houses be brought under the scope of indemnificatory houses?
To regulate the real estate market under such a background, we can not say it is the passive response to the government in face of the stern public opinion: Just do the public justice without affecting the total tax income, to say nothing of lifting a rock only to drop it on our own feet (real estate information disclosure and real property tax).
The determination of the central government is beyond doubt and the strong support given by the local government officials are encouraging. However, on a second thought, which local government can earnestly carry out the regulation targets set by the central government? Which local government official is taken to task if he fails to make it?
Let’s delve into the previous policies and we can see clearly that the falling real estate price has never been the purpose of the policies. If you are so obstinate in saying there is something hind, it must be “a stable real estate price”, “curbing the fast rise of the real estate price”. In case of the falling real estate price, it means that the real property price won’t go down ; but in case of the rising real estate price, it means that the central government won’t hope the faster rising price.
Up to today, it is not a problem at all as to how to regulate the real estate market as the academic circle and the industry have prepared numerous solutions. However, the key lies: what is our real purpose or goal? Under such a purpose or goal, we will try to balance the benefits of all stakeholders: who benefits more and benefits less. So we can not revel in any unrealistic fantasy. So we have to revert to the fundamental issue: who determines the balance point of this benefit distribution?
Evidently, this is a decision concerning the public policy, so we are supposed to get more stakeholders involved in the discussion for the decision on the final policy, but actually we try to sort out the problem before we can achieve the consistent regulation objective. That way, we cannot have one party suffer a loss and have the other group only benefit, and sure we can have the earnest responsibility assigning mechanism and the real estate regulation can be earnestly implemented for the expected goal.
Originally published on Xinmin Weekly | 2013-3-14
