In a report published on September 13, Southern Weekend said that Wenzhou housing speculators are now dumping real property, and that property owners have relinquished over 10,000 units of flats or commercial property with outstanding mortgages or were pledged to banks. This number exceeded the total supply of new flats in Wenzhou in 2012.
Since the funds used to speculate real property in Wenzhou came almost entirely from private capital, other areas were not too worried if Wenzhou would be the first fallen domino leading to the burst of property bubble.
Yet, whether or not this bubble would burst in the near future, one cannot help but feel that this so-called golden age (better called as "gilded age") of China is a period of absurdity when reviewing this unitary “pillar industry” of China and all the tragedies and bizarre things that happened around it.
What facilitated the "Gilded Age"?
Excessive investment in real property led to the continuation of China's economic structure deformity. The following citations were from Chinese news media: in the first half of 2013, total real property investment accounted for 14.8% of China's GDP, compared to 13.5% in 2012. The residential investment made up 70% of total investment in real property.
The only thing that got more investment than real property was the manufacturing sector, which contributed 18.7% of the total of China's GDP. However, the manufacturing sector contained all fixed asset investment in the second industry, and the real property was only one of the sub-sector of the third industry. Compared with the percentage of investment in any of the sub-sectors of the second industry, the investment in real property appeared abnormally large.
Compare with the data of Japan and the United States, one could see just how big this bubble of China really is. At the height of the economic bubble of Japan, investment in real property had never exceeded 9% of the country’s GDP; in the US, when Fanny Mae and Freddie Mac triggered a financial crisis in 2008, the same figure did not rise above 6%.
As can be seen, the “unitary boom” of the real property is struggling to keep China's "gilded age" afloat.
China’s Real Property: sweet dreams for some, nightmares for others
At present, the Chinese real porperty has evolved into a state where prime land parcels are being auctioned at record high prices while ghost towns emerge.
In several major cities where land parcels have frequently been auctioned at high prices, local government and real property developers are having one sweet dream after another. By contrast, in cities where ghost towns sprung up, real property developers and buyers felt profound anguish, as though they were being grilled in scorching heat. While local governments of these cities have not been burnt by this heat, they are on edge all the same.
Just this last May, there was a “fever” in Chinese land market, housing developers competing to acquire land became a scene that played out in cities after cities. Land parcels auctioned at record price emerged in succession, pushing up land prices and setting new records for local government revenue from land sales.
E-house China R&D Institute published in May a report with data showing a surge in land trading volume in the country’s 10 major cities during the first five months, and land transfer revenue totaled 66.99 billion yuan, increased by 392.6% year-on-year, that is, a fourfold jump. In Beijing, Shanghai, Guangzhou, Hangzhou and other first- and second-tier cities, land auctioned at record prices took place again and again, and housing supply remained insufficient.
In the first half of this year, Beijing’s revenue from land sales exceeded one hundred billion, tens of billions more than the whole of last year.
While municipal governments of Beijing, Shanghai and other cities took in huge profits from land sale, a massive number of ghost towns, in addition to the well-known ghost town of Ordos, appeared in Yingkou, Changzhou and other third- and four-tier cities.
How many ghost towns are there in China? The Time Weekly published in July this year a story entitling "China's new ghost towns" and recounted the 12 famous Chinese ghost towns, which were of course only the more notable ones of the dozens of ghost towns across China.
Who will buy China's real property?
With no solution at hand, the current government of China could not but repackage real property as new urbanization project. It was said that the project planned to build twenty new towns each year in the next two decades. At a time when ghost towns are mushrooming in third- and fourth-tier cities, whether or not those tens of thousands of new flats would have buyers became the biggest uncertainty for that project.
China's housing price-to-income ratio is the highest in the world: in Beijing the number is about 25; in Shanghai, 20; and the average ratio in most part of the country stands above eight. Due to this price-to-income ratio far higher than the world's average level, over 80% of Chinese people find housing unaffordable.
In this case, who are buying China's limitless supply of new flat? Hurun Research Institute highlighted findings from Chinese Luxury Consumer Survey 2013 in January, saying that “Property is still the key personal investment option for most surveyed (over 60%), despite increased government control on property purchases and a generally poor market.”
Aside from these investors who could disclose their identity, Chinese officials make up the bulk of real property buyers. Back in 2009, 2000 Shanghai city management cadres were asked to declare property to their names. The result was an embarrassment for the Municipal Commission for Discipline Inspection of Shanghai.
Fearing the request was a prelude to smoking the snake out, those officials did not declare all of the property they owned. Nonetheless, it was commonplace that each official had four to six units of flats, some even declared over a dozen units of flats their family owned.
The secret behind these officials who managed to purchase so many units of flats was the concessionary offers made to them. Apart from officials in departments directly related to real property, officials in industry and commerce, taxation, planning, judicial and other departments that were involved in a real property project were also presented with special offers. Based on developers' estimate of the flats' values, these officials got 30% to 50% percent off—they were actually taking bribes in disguise.
Shanghai is not a political island. The phenomenon of officials stockpiling on flats was not unique to the city. Several years ago, the Ministry of Housing and Urban-Rural Development embarked on establishing an individual housing information system covering 40 cities. But the system's completion date was repeatedly postponed, allegedly because the program encountered strong resistance from officials across the country.
After some members of the “apartment family” got exposed in January 2013, some local governments hastily imposed regulations on housing information query, prohibiting queries about real estate information.
In mid-August, National Treasury official Jia Kang publicly revealed that the housing information system met with considerable difficulties and would need two more years to complete.
Real Property bubble
Both Chinese internet surveys and hedge fund Pivot Capital's interviews found that more than two-thirds of the Chinese people wish the real property bubble to burst as soon as possible.
I do not know whether or those respondents own real estate themselves, but I could understand what gave rise to this wish.
China's housing prices are so high that over 80% of the Chinese population couldn't afford to buy a flat. Those middle-class families that purchased their own home have either shifted the burden of debt repayment to their fathers and mothers or become slaves to their apartments themselves.
When the ordinary Chinese people spend they entire life and still find it hard to have a flat to their name, the news that members of “apartment family” own dozens or even hundreds of units of flats caused Chinese netizens to feel deep grievances against local government's forced land requisition and removal, and resentment toward officials and developers who profiteered from real property. These sentiments prompted a saying to go viral: “without real property, there would be no new China.”
The investment sector and watchers are of one opinion that there is a huge bubble in the Chinese real property market. The only disagreement between them is when would this bubble burst.
Most of those who want to try their luck believe that with the full support from the government, the real property bubble is shored up; they regarded those Wenzhou speculators who dumped their flats as people who lacked confidence. It could thus be said that the pillar that is supporting the Chinese real property market is chiefly the buyers' confidence in the government.
However, the Chinese people's confidence in the government could in no way be stronger than the blind faith they once had in Mao Zedong.
The European countries of Ireland and the Netherlands, once prosperous and hopeful, had both gone through national tragedy triggered by real property. As housing prices fell sharply, property buyers became insolvent and edged to the blink of bankruptcy, and the whole country plunged into recession.
With China's real economy so much weaker than that of the United States, who can say for sure that when China's real property bubble bursts, the country would not suffer the fate of Ireland and the Netherlands?
What facilitated the "Gilded Age"?
Excessive investment in real property led to the continuation of China's economic structure deformity. The following citations were from Chinese news media: in the first half of 2013, total real property investment accounted for 14.8% of China's GDP, compared to 13.5% in 2012. The residential investment made up 70% of total investment in real property.
The only thing that got more investment than real property was the manufacturing sector, which contributed 18.7% of the total of China's GDP. However, the manufacturing sector contained all fixed asset investment in the second industry, and the real property was only one of the sub-sector of the third industry. Compared with the percentage of investment in any of the sub-sectors of the second industry, the investment in real property appeared abnormally large.
Compare with the data of Japan and the United States, one could see just how big this bubble of China really is. At the height of the economic bubble of Japan, investment in real property had never exceeded 9% of the country’s GDP; in the US, when Fanny Mae and Freddie Mac triggered a financial crisis in 2008, the same figure did not rise above 6%.
As can be seen, the “unitary boom” of the real property is struggling to keep China's "gilded age" afloat.
China’s Real Property: sweet dreams for some, nightmares for others
At present, the Chinese real porperty has evolved into a state where prime land parcels are being auctioned at record high prices while ghost towns emerge.
In several major cities where land parcels have frequently been auctioned at high prices, local government and real property developers are having one sweet dream after another. By contrast, in cities where ghost towns sprung up, real property developers and buyers felt profound anguish, as though they were being grilled in scorching heat. While local governments of these cities have not been burnt by this heat, they are on edge all the same.
Just this last May, there was a “fever” in Chinese land market, housing developers competing to acquire land became a scene that played out in cities after cities. Land parcels auctioned at record price emerged in succession, pushing up land prices and setting new records for local government revenue from land sales.
E-house China R&D Institute published in May a report with data showing a surge in land trading volume in the country’s 10 major cities during the first five months, and land transfer revenue totaled 66.99 billion yuan, increased by 392.6% year-on-year, that is, a fourfold jump. In Beijing, Shanghai, Guangzhou, Hangzhou and other first- and second-tier cities, land auctioned at record prices took place again and again, and housing supply remained insufficient.
In the first half of this year, Beijing’s revenue from land sales exceeded one hundred billion, tens of billions more than the whole of last year.
While municipal governments of Beijing, Shanghai and other cities took in huge profits from land sale, a massive number of ghost towns, in addition to the well-known ghost town of Ordos, appeared in Yingkou, Changzhou and other third- and four-tier cities.
How many ghost towns are there in China? The Time Weekly published in July this year a story entitling "China's new ghost towns" and recounted the 12 famous Chinese ghost towns, which were of course only the more notable ones of the dozens of ghost towns across China.
Who will buy China's real property?
With no solution at hand, the current government of China could not but repackage real property as new urbanization project. It was said that the project planned to build twenty new towns each year in the next two decades. At a time when ghost towns are mushrooming in third- and fourth-tier cities, whether or not those tens of thousands of new flats would have buyers became the biggest uncertainty for that project.
China's housing price-to-income ratio is the highest in the world: in Beijing the number is about 25; in Shanghai, 20; and the average ratio in most part of the country stands above eight. Due to this price-to-income ratio far higher than the world's average level, over 80% of Chinese people find housing unaffordable.
In this case, who are buying China's limitless supply of new flat? Hurun Research Institute highlighted findings from Chinese Luxury Consumer Survey 2013 in January, saying that “Property is still the key personal investment option for most surveyed (over 60%), despite increased government control on property purchases and a generally poor market.”
Aside from these investors who could disclose their identity, Chinese officials make up the bulk of real property buyers. Back in 2009, 2000 Shanghai city management cadres were asked to declare property to their names. The result was an embarrassment for the Municipal Commission for Discipline Inspection of Shanghai.
Fearing the request was a prelude to smoking the snake out, those officials did not declare all of the property they owned. Nonetheless, it was commonplace that each official had four to six units of flats, some even declared over a dozen units of flats their family owned.
The secret behind these officials who managed to purchase so many units of flats was the concessionary offers made to them. Apart from officials in departments directly related to real property, officials in industry and commerce, taxation, planning, judicial and other departments that were involved in a real property project were also presented with special offers. Based on developers' estimate of the flats' values, these officials got 30% to 50% percent off—they were actually taking bribes in disguise.
Shanghai is not a political island. The phenomenon of officials stockpiling on flats was not unique to the city. Several years ago, the Ministry of Housing and Urban-Rural Development embarked on establishing an individual housing information system covering 40 cities. But the system's completion date was repeatedly postponed, allegedly because the program encountered strong resistance from officials across the country.
After some members of the “apartment family” got exposed in January 2013, some local governments hastily imposed regulations on housing information query, prohibiting queries about real estate information.
In mid-August, National Treasury official Jia Kang publicly revealed that the housing information system met with considerable difficulties and would need two more years to complete.
Real Property bubble
Both Chinese internet surveys and hedge fund Pivot Capital's interviews found that more than two-thirds of the Chinese people wish the real property bubble to burst as soon as possible.
I do not know whether or those respondents own real estate themselves, but I could understand what gave rise to this wish.
China's housing prices are so high that over 80% of the Chinese population couldn't afford to buy a flat. Those middle-class families that purchased their own home have either shifted the burden of debt repayment to their fathers and mothers or become slaves to their apartments themselves.
When the ordinary Chinese people spend they entire life and still find it hard to have a flat to their name, the news that members of “apartment family” own dozens or even hundreds of units of flats caused Chinese netizens to feel deep grievances against local government's forced land requisition and removal, and resentment toward officials and developers who profiteered from real property. These sentiments prompted a saying to go viral: “without real property, there would be no new China.”
The investment sector and watchers are of one opinion that there is a huge bubble in the Chinese real property market. The only disagreement between them is when would this bubble burst.
Most of those who want to try their luck believe that with the full support from the government, the real property bubble is shored up; they regarded those Wenzhou speculators who dumped their flats as people who lacked confidence. It could thus be said that the pillar that is supporting the Chinese real property market is chiefly the buyers' confidence in the government.
However, the Chinese people's confidence in the government could in no way be stronger than the blind faith they once had in Mao Zedong.
The European countries of Ireland and the Netherlands, once prosperous and hopeful, had both gone through national tragedy triggered by real property. As housing prices fell sharply, property buyers became insolvent and edged to the blink of bankruptcy, and the whole country plunged into recession.
With China's real economy so much weaker than that of the United States, who can say for sure that when China's real property bubble bursts, the country would not suffer the fate of Ireland and the Netherlands?
