Real estate fever needs a cure
Chen Hong  Updated: 2004-05-21 08:35

The latest economic figures indicate fixed asset investment in April grew by 34.7 per cent year-on-year - 8.8 percentage points lower than the previous month.

Amid widespread concerns about the overheating of China's economy, this is enough to provide at least a temporary sense of relief.

But the current investment growth is still far too high compared to the ideal level of around 20 per cent for maintaining the nation's sustainable economic growth.

Economists attribute such a boom to overheated property investment. Constantly rising property prices in almost every Chinese city is the very lure for more capital swamping into the sector. And sky-high property prices are one of the key indices prompting authorities to take measures to cool down the economy.

As to the causes for driving up property prices, many point to so-called "Wenzhou property-buying gangs."

These "gangs" are actually groups of wealthy investors from Wenzhou, a city in East China's Zhejiang Province. Holding large sums of money, they purchase newly-built properties and sell them at higher prices after a short time to turn a quick profit.

Their investment can be found in many cities ranging from Shanghai, Hangzhou near Wenzhou to Chengdu and Chongqing in the inland region.

Since they always purchase the properties in groups with huge sums of money and profit from the quick sales, they are thought to unavoidably manipulate property prices to their own advantage.

The lowest property price in Wenzhou has risen from 2,000 yuan (US$241) per square metre to 4000 yuan (US$482) per square metre, presumably because of this kind of group buying.

"Such a high property price is an obstacle to further development of local economy," said Yin Zhongli from the Institute of Finance and Banking under the Chinese Academy of Social Sciences (CASS).

Yin is among many experts calling for governmental intervention in the speculation of Wenzhou groups. They think rocketing property prices are primarily the result of such market manipulation, with Wenzhou groups as the most typical example.

Insiders estimate the Wenzhou groups have at least 100 billion yuan (US$12.05 billion) to invest in property. Since property can be purchased with bank loans, that 100 billion yuan can be used for the down payment, which can be as low as 20 per cent of the sale price. In other words, the total capital involved in the Wenzhou groups' businesses may be much more than their own capital. And that will help the purchasers gain considerable leverage in the market.

In Shanghai, where the average price of an apartment stands at 5,118 yuan (US$616.63) per square metre, the highest in the nation, the area of commercial housing that is bought for the purpose of investment or speculation takes 16 per cent of all sold commercial housing. And the figure reaches 39 per cent if commercial housing of over 7,000 yuan (US$843.37) per square metre is calculated separately.

In other cities where property is less expensive, the effect of market manipulation is even more visible.

Sun Xingquan, a professor with the Business School of Wuhan University in Central China's Hubei Province, points out that housing speculation exaggerates the demand while the housing, given the unique characteristics of the commodity, only has a limited supply. As a result, property prices are driven upward until those who really need a house but cannot afford one give up their dream.

This, as Yin and Sun argue, harms the welfare of the low-income groups, putting property far out of their reach. From the perspective of macro economy, higher-than-reasonable property prices also jeopardize growth in consumer goods consumption because those who do not have property at the moment tend to be more "pessimistic" about the future with regard to the property price and cut down current consumption.

Yin believes rising property prices will slow down China's urbanization because they dramatically raise the cost of settling down in towns and cities.

However, defenders of the Wenzhou groups are not rare.

Zhang Baoquan, a real estate developer and deputy chairman of the Chamber of Commerce for Housing Industry under All-China Federation of Industry and Commerce, has a different calculation of idle money's share in the property market.

Zhang believes only 3 to 5 per cent of money going for purchasing property is purely for market speculation. He does not think this percentage is enough to push up property prices.

Ren Zhiqiang, president of Huayuan Group, a real estate developer based in Beijing, insists the Wenzhou groups are able to find the true value of properties before others and that is why they profit from the business.

Some also subscribe to the theory that the Wenzhou groups only select property as an investment tool, which is no different than investing in the stock market. As long as they do not violate current laws, such investment should not be blamed.

However, the real problem in judging property market speculation goes beyond the debate on Wenzhou groups and the holders of idle money who profit from property prices.

Yi Xianrong, director of the Finance Development Division under the CASS Institute of Finance and Banking, said accusing Wenzhou groups of property speculation and harming the interests of other consumers is not getting to the point of the issue because they are not the real maker of the situation.

Under the current system of land ownership and land transference, not every property developer is able to acquire the land he or she needs, nor at a price that is acceptable by the market standard.

Yi Xianrong believes land transfer through contract has severely distorted land prices. Those who have access to land are mostly enterprises connected with the government. Thus, the land market becomes monopolized, or one that is under the collective control of some big names.

So the property market, which is based on the land market, can never be fully competitive. In this market, profits from rising prices are mostly garnered by the monopolizers, and the Wenzhou groups have only a thin slice from this big cake.

The unreasonable land transfer system and the monopolizers of the property market, instead of the Wenzhou groups, are the real price-setters on the market.

In this situation, government intervention in the property market, which is being called for repeatedly, should first of all aim to change the land transfer system and encouraging competition in the property market.

As to market speculation, the government should enhance its supervision with market-orientated means, like taxation, rather than simply adopting administrative means.

If property prices keep going up and reach an unreasonable level, the trend will certainly threaten sustained growth of the economy.

Cooling down the property fever needs to become a priority.

(China Daily)

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