"So much for cooling the market," writes the South China Morning Post today, pointing to the record sales announced by China Vanke, the mainland’s largest listed property developer last month.
Vanke says it earned 11.9 billion yuan ($1.75 billion) and that property sales rose 84% in Shenzhen, 56% in Guangzhou, 31% in Shanghai and 23% in Beijing.
It looks very much like the lull in property transactions is over, the market is picking up, and some people are whispering darkly that Beijing will have to take additional measures to calm things down again, or at least enforce the measures that have already been put in place.
"This may trigger the introduction of stricter enforcement of existing measures," said Lee Wee-liat, regional property research head at Samsung Securities, to the SCMP. "If prices continue to grow, the government may introduce a property tax in one or two cities or even tighten credit conditions for developers as a way to reduce the asset bubble."
However, Jing Ulrich, the head of Chinese equities and commodities at JP Morgan, told me yesterday that she thinks there will not be any new regulations from the government.
Her argument is that a stream of millions of new affordable homes will enter the market and that supply and demand will naturally help cool prices.
In an excellent note, she points out that the central government has set an official target of 5.8 million new affordable homes to be built this year, and that it hopes to bring as many as 13 million new affordable homes into the mix by 2011. In a country of 300 million households, she notes, that is a significant bump and should be enough to calm worries about property and bring down prices.
Of course, we’ve heard the story about affordable housing before, but the good intentions of the central government have been swamped in the past by the collusion between avaricious property developers and local governments, who, after all, depend on land sales for as much as 30% of their annual revenues.
Why would they then want to transfer the land at rock-bottom rates for affordable housing, especially when many of them have problems on their balance sheets as it is?
According to a World Bank report, Ms Ulrich says, only two-thirds of last year’s planned 3.1 million new units of affordable housing were actually built. And photographs of some of the "affordable" housing projects in Beijing showed BMWs and Mercedes in the parking lots – it was actually high-end property in disguise – lamb dressed as mutton, if you will.
Furthermore, by the middle of this year, less than a quarter of the land designated for economic and low-rent housing had been allocated, according to the Ministry of Land and Resources.
Nevertheless, Ms Ulrich believes this time, things are different. For one thing, the local governments do appear to be making the right noises. Beijing has said 30% of new build must be affordable while Shanghai has said 5%. Local governments are experimenting with new ways of funding the projects, including REITS, and the central government has budgeted over 60 billion yuan to transfer to local government coffers.
Meanwhile, although building these projects seems less profitable for the developers, the fact that they can build them quickly and cheaply, and sell them without risk (the government distributes the properties) means it is a safe bet in a difficult market. Ms Ulrich reckons the attraction of the plans is far above the 5% or so return on investment.
If she is right, it will be interesting to see how the property market readjusts. It also seems the most plausible solution to the housing bubble and to the schism that is being driven between rich and poor. If those houses get built, we could be hailing the plan as a real triumph when 2011 rolls around.
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