Forever Blowing Bubbles
Will the potential collapse of housing markets in second- and third-tier cities affect the white-hot markets in China’s biggest urban centers?
Yang is at a loss after his small plot of farmland was appropriated by the local government three years ago in exchange for just enough compensation to buy into a new resettlement housing project also being built by the government.
“I’ve been eking out a living on the land my whole life, but now it is all gone,” the 58-year-old farmer in Wuwei, northwest China’s Gansu Province told our reporter. Yang used to support his family of three by growing vegetables on a meager plot of 1.3 mu (0.2 acres). Now, that livelihood is gone.
After being appropriated for the cheap price of 125,000 yuan (US$20,400) per mu, more than 2,000 mu (329 acres) of land in Yang’s village was sold on to property developers by the government for more than 400,000 yuan (US$65,400) per mu (0.16 acres), giving the government a profit margin of about 300 percent. Even this hefty profit margin is likely to be dwarfed by the rocketing market price of China’s dwindling land resources, which is predicted to hit 3 million yuan (US$490,000) per mu amid the country’s ongoing construction boom.
Land price hikes have in turn driven up housing prices way beyond the budget of the vast majority of Chinese people. Wuwei city, its population of 1.9 million making it a relatively small place by Chinese standards, was ranked second nationwide on the scale of vulnerability to housing market risks introduced by the China Real Estate Information Corporation (CRIC). Longnan, another city in underdeveloped Gansu Province, topped the same scale, while another four cities in the same province placed in the top 10.
Meng Yin, director of the CRIC, said that economically backward western China was home to nine of the country’s 10 most vulnerable housing markets.
Local officials, the people driving what critics call an unsustainable and poorly-structured housing boom, have refuted claims that a bubble is threatening to bankrupt China’s hinterland. An official surnamed Wang with Wuwei’s housing administration told NewsChina that there is “robust demand” for the city’s newly erected condominiums, claiming that dispossessed farmers are enthusiastically relocating to brand-new urban housing complexes.
How exactly these below-minimum-wage earners are affording these new condos is unclear. In the construction frenzy which swept Gansu and most of western China between 2009 and 2012, local housing prices shot from 2,000 yuan (US$330) per square meter to over 5,000 yuan (US$820), meaning that a single square meter of urban housing costs the equivalent of 83 percent of the average Chinese farmer’s annual income. And despite housing being priced by the square meter, it is retailed by the unit.
According to the 2013 Annual Report on the Development of the Western Regions in China released by the Chinese Academy of Social Sciences, investment in the housing industry in China’s west grew 20.4 percent in 2012 over the previous year, while sales only grew 3.7 percent in the same period.
Housing investment in Gansu Province in particular has been continued at a breakneck pace despite no indication of a rise in demand. In 2010, housing investment in Linxia, Gansu tripled on the same period in 2009, while three other cities saw an average 70 percent rise in investment.
Until now, there was little indication that investors are losing their appetite. Gansu’s year-on-year growth rate in 2012 still stood above 50 percent according to the local statistics bureau.
However, in the first half of 2013, growth in real estate investment dropped by around 30 percent, with sales growing by only 6.5 percent on the same period in 2012. Countless pristine but deserted housing complexes are a visible testament to the overestimation of the potential locked up in Gansu’s cities.
Though housing prices in Wuwei have yet to fall dramatically, the city’s newly built apartments are now retailing at cost price according to Liu Weiqiong, a sales manager with a local developer.
Other cities are showing similarly alarming trends. In Ordos, Inner Mongolia, house prices have fallen 80 percent from a high of 30,000 yuan (US$4,900) per square meter in 2009. In the nearby new town of Kangbashi, rows and rows of darkened windows in vast high-rise housing developments at night have earned this under-populated urban landscape the title of China’s foremost ghost town.
There are plenty of other contenders to this title. Hohhot, capital of Inner Mongolia, Zhengzhou and Hebi in Henan Province, Yingkou in Liaoning, Chenggong in Yunnan, Shiyan in Hubei and Zhenjiang in Jiangsu are all cities swamped with deserted high-rises as China’s underpaid consumer class continue to defy unscrupulous developers.
The bursting of these obvious property bubbles is now seen as a foregone conclusion. According to a report by the Chinese Academy of Social Sciences, China’s developers have been building homes at a speed that outstrips population growth since 2008, with the average urban Chinese family already owning more than one apartment.
Almost all cities listed in the top 50 in the CRIC housing risk scale are classed as third-tier cities. Only China’s four so-called “mega cities” – Beijing, Shanghai, Guangzhou and Shenzhen – are so far classed as first-tier cities. The country’s other largest cities and most provincial capitals are classed as second-tier, while prefectural- and county-level cities are in the third tier. Third-tier cities have historically been the principle source of cheap labor and population growth in second- and first-tier cities. With population and wage growth in third-tier cities stagnating as a result of the brain drain to burgeoning population centers in the developed east, it remains unclear how local authorities propose to avert economic backsliding.
According to He Tian, director of the China Index Academy, a housing research body, income and population growth in most third-tier cities have lagged far behind housing market expansion. Only government officials and civil servants living in these areas are seen as potential homebuyers, and this weak purchasing power has contributed to the current real estate bottleneck.
Poor sales, grim economic data and a rising number of ghost towns are all offering highly visible red flags to governments, developers and speculators. Yet, even in the most vulnerable areas, the bulldozers continue to work through the night. One of the most ambitious new town construction programs was launched just this year in Guiyang, capital of Guizhou Province, where the four mega construction projects, with each boasting a total floor space of more than 10 million square meters, could house the city’s entire existing population. Essentially, the project will double the size of a city which already appears to have adequate housing for its existing residents.
As China’s leaders attempt the mammoth task of shifting the country’s economic weight from manufacturing onto services, housing prices in first- and second-tier cities are expected to keep growing. According to Fan Jianping, chief economist of the State Information Center, the uneven distribution of resources throughout China’s economy mainly explains the concentration of the population in big cities.
Speaking at a recent conference, Fan told reporters that “a better part of the best educational and medical services is concentrated in the provincial capitals or big municipalities, which helps drive the influx of population.”
The latest census found that in the 2000s, Beijing’s population grew by 37 percent, and Shanghai’s by 40 percent. Both cities continue to register major housing deficits despite ongoing construction, as hundreds of thousands of workers from the hinterland swarm into China’s most prosperous mega-cities.
In September 2013, Beijing’s housing developers reported sufficient lots to keep pace with population growth for only the next six months, a situation which could lead to yet another price hike, according to He Tian of the China Index Academy. Beijing’s land resources have also begun to dwindle, failing to meet demand for three years in a row.
Housing prices in 70 Chinese cities, a majority of them in the first- and second-tier category, have risen for more than 10 consecutive months according to data from the National Bureau of Statistics. Government attempts to rein in growth have been limited to purchasing caps, restricting sales to those with local residency, and sanctions on developers – measures which, in corruption-riddled China, are easily circumvented by those with the capital or connections to do so.
For example, the Shaanxi provincial government imposed a 10-percent cap on the profit margins of property developers, while in Beijing advance-sale licenses for new property development projects need approval from a deputy mayor.
However, neither measure has so far borne fruit. In August, only China’s four first-tier cities – Beijing, Shanghai, Guangzhou and Shenzhen – saw their net housing inventory decrease, while unsold housing continued to pile up in second- and third-tier cities. According to the China Index Academy, about 4 billion square meters of floor space, equivalent to 40 million three-room apartments, were constructed in second- and third-tier cities by the end of 2012 – enough to give these urban centers a four-year housing surplus.
These attempts to control housing prices by suppressing the demand through administrative measures are, in the view of critics such as Pan Xiangdong, chief economist with Galaxy Securities in Beijing, bound to distort the market unless the problem is tackled at the root – the poor distribution of resources.
In Qinhuangdao, a small coastal resort city in Hebei Province with barely one million residents, more than 50 million square meters of new residential housing has been built in recent years, or 500,000 100-square-meter apartments. A local real estate agent estimated that it would take up to a decade to sell Qinhuangdao’s glut of property. While a few high-end developments have proven popular with holiday home seekers, sales have been slow since prices began a sharp decline in August.
For the governments of third-tier cities, heavily reliant on sales of appropriated land, a stagnant or depressed housing market could spell disaster. Some places are already seeing signs of a squeeze. In Wuwei, the construction of a new stadium, government office buildings, a theater and a museum, all initiated at the height of the land sales boom, have all been suspended due to shortage of funds. For farmers like Yang, the shortfall in the government budget has proven crippling. His relocation apartment, due to be completed by June this year, has been left half-finished after the government defaulted on payments to the contractor, leaving Yang temporarily homeless.
After losing his land, Yang has been doing odd construction jobs in the city, with his age a barrier to more stable employment. He is now anxiously awaiting turning 60, when he will, at least according to his agreement with the government, become entitled to a 603 yuan (US$99) monthly pension.
Yang, and many others like him, can do little more than cross his fingers and hope that, this time around, the government may at least keep its word.
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Sep 2011 | Submitted by Brian Snelson
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