Page 2 of
2 Another chill pill for China's
property sector By Kent Ewing
by Sina.com and New Real Estate
magazine, says that new homes, which sold at an
average price of 6,178 yuan (US$792) per square
meter in 2004, now sell for 8,792 yuan per square
meter.
In addition, a study by the
Beijing-based Homelink Real Estate Co found that
in 2005, the average price of a home in the
capital was 9.4 times the average annual
disposable income of Beijing families. Compare
this with the World Bank's recommendation
that
the cost of housing should not be more than five
times a homeowner's annual pay. The United Nations
recommends that housing cost no more than three
times yearly income.
City records for 2005
show that average family disposable income in
Beijing was $6,566, while the price of a new home
was $61,560.
In southern cities such as
Guangzhou and Shenzhen, the situation is much the
same, if not worse: if you're rich, the choices
are many; if you're not, stand in line - a long
line.
In Guangzhou, the average price of a
new home rose last month to a record $922 per
square meter, an increase of more than 8% over
November, while the average price in Shenzhen rose
nearly 30% to $1,167 per square meter over the
previous year. At the same time, property agents
in Shenzhen report that 30% of new luxury housing
estates are unoccupied and, in some cases, up to
50% are vacant.
According to the National
Bureau of Statistics (NBS), 123.55 million square
meters of commercial housing were vacant in China
by the end of November, a rise of 7.9% over 2005.
Vacancies in residential buildings were reported
at 67.23 million square meters, up 6.4%, but in
major cities the percentage was no doubt much
higher, especially for high-end properties.
China's financial capital, Shanghai, has
proved the exception to the rule of rising cost,
with property prices dropping 1.1% last year and
the central government pointing to the city as a
shining example of how its macroeconomic measures
are working.
Besides building more low-
and middle-income housing, these measures include
using taxation, banking regulations and land
policies to stabilize the property market and
penalize developers who hoard land and
artificially inflate prices. But the task is
daunting: a Beijing Normal University survey shows
that 70% of the people living in eastern cities,
where prices are the highest, cannot afford to own
a home.
Meanwhile, the government's edicts
on reform continue to be frustrated by the corrupt
bargain struck by local officials and property
developers.
The property boom was a big
contributor to China's 10.5% growth in gross
domestic product last year, and soaring land
premiums and fat bribes too often characterized
the cozy relationship between local officials,
whose competence is judged solely on their
economic performance, and developers, who get rich
on spiraling prices.
Most worrisome is the
possible effect of a property bubble on China's
banks. In its end-of-year financial report, the
People's Bank of China (PBoC), the country's
central bank, called fluctuations in the
real-estate market a threat to banking security.
In other words, if the bubble does burst, it will
be a banker's nightmare.
According to the
report, the ratio of individual housing loans to
overall volume of credit in financial institutions
increased to 33.9% in 2005. That compares with a
rise of 6% in 2000 and 21% in 2003. Such figures
betray the weakness of Chinese banks, which lack
financial innovation and have few viable avenues
for lending besides real estate.
In
another attempt to curb lending, this month the
PBoC once again raised the reserve requirement for
Chinese banks. Starting this week, banks must put
aside 9.5% of deposits, a rise of half a
percentage point. The central bank raised the
requirement by the same amount in June, July and
November after two years without an increase. It
estimates that every such increase reduces funds
available for lending by $19 billion.
The
PBoC also twice raised interest rates last year to
reach 6.12%, but the property market continued its
relentless rise. Investment in China's real-estate
sector was up 24% over the first 11 months of
2006, according to NBS.
So-called "hot
money" flowing into China from overseas played an
important role in that increase. A 20%
capital-gains tax on property resold within five
years of purchase was supposed to dampen the
speculators' zeal, but the money keeps coming.
Whether the levy of VAT on land will
effectively cool down the property market remains
to be seen. But the tough measure will definitely
hurt property developers financially.
"With the reintroduction of the
value-added tax on land, the property sector will
rank among the industries with the heaviest tax
burdens in China, and falling profits will dampen
future investment in the sector," the Oriental
Morning Post quoted an unidentified developer in
Shanghai as saying.
"Some developers may
suffer great pressure once the tax is formally
collected," Xiao Li, secretary of the board of
directors of China Vanke, a major developer based
and listed in Shenzhen, told the Shanghai-based
newspaper. "Vanke had set aside 300 million yuan
by 2006 in preparation for the reintroduction of
the tax," said Xiao.
Share prices of
mainland property developers sharply dropped on
Wednesday in an immediate reaction to the news.
Share prices of all listed property developers in
the Shanghai and Shenzhen bourses shed about 10%.
In Hong Kong, share prices of mainland developers
dropped by about 8%.
Kent Ewing
is a teacher and writer at Hong Kong International
School. He can be reached at
kewing@hkis.edu.hk.
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