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High House Prices Spark Concerns

Real estate in cities especially in several metropolises such as Beijing, Shanghai and Guangzhou is getting more expensive, worrying urban dwellers and economists.

Zhang Hongyu, a 34-year-old Beijing resident, has been married for 13 years. He, along with his wife and parents, are crammed into a tiny, one-story 20-square-meter house on the city's south side. Zhang began to work with the Beijing Public Transportation Corp. when he left senior middle school at the age of 19. He now earns 1,500 yuan (US$181.16) a month, a bit higher than the average salary in the Chinese capital. Although his wife works in the same company, the couple cannot afford a larger apartment, despite their frugality.

"I wouldn't be able to pay for an apartment even if I saved every cent I earn," Zhang said despairingly. Gazing at Kaiyangli, new residential buildings that are for sale, he could not hide his anxiety.

Zhang also visited other commercial apartments, only to find they are even more expensive than a few months ago. He sighed, "I had planned to buy an apartment on credit, with my savings covering the down payment, but now it seems impossible. Prices are skyrocketing."

Rising prices for some time

When Zhang hunted for an apartment months ago, China's economy was undergoing a period of overheated investment. Since the price of raw materials had gone up, price tags on housing got bigger, too. In order to curb overheating, the Central Government introduced macro-control measures. Zhang was relieved initially, believing this would precipitate a price drop.

However, Zhang has been frustrated at the fact that apartments are still increasingly expensive, although the price of raw materials has declined due to government-restricted investment.

According to the National Bureau of Statistics (NBS), China's investment in real estate development totaled 492.4 billion yuan (US$59.47 billion) in the first half of 2004, a year-on-year increase of 28.7 percent and 5.3 percentage points lower than last year's rate. However, market investigation in 35 major cities showed that in the first quarter of this year housing prices were 7.7 percent more compared to the same period last year. In the second quarter, the growth rate was 10.4 percent when compared with last year's same period, with that of Beijing standing at 3.3 percent and that of Shanghai at 21.4 percent, which was the highest among the cities surveyed. The cost of housing in the second quarter was 2.3 percent higher than in the first quarter.

There is no clear sign indicating a halt to the rising prices. Real estate experts and developers suggest that the price will continue to rise in the months to come. Feng Lun, Chairman of the Board of Directors of Beijing Vantone Real Estate Co. Ltd., says, "The price of Chinese real estate will maintain an upward trend. In big cities like Beijing, Shanghai and Guangzhou, there is still room for a price surge."

A few reasons

So if boiling investment has been cooled by macro-control measures, why is housing still getting more expensive?

NBS officials attribute the sector's inflation to the inert prices in previous months, which resulted from excessive investment in real estate, coal, steel, electrolytic aluminum and other sectors. So they predict housing prices may continue to grow for some time, though increased investment has dropped already.

Pan Shiyi, Chairman and Co-Chief Executive Officer of Small Office Home Office (SOHO) China, thinks that the cause lies in the decreased housing supply.

The first half of 2004 witnessed a slowdown in the nation's real estate construction. The total area of newly started projects was 280 million square meters, a year-on-year increase of 15.2 percent, which was 15.8 percentage points lower compared to last year's growth rate during the same period. The total area completed was 95.53 million square meters, up 15.6 percent over the same period last year, but the growth rate declined by 24.8 percent compared with the same period last year.

However, the area of housing sold reached 110 million square meters, a year on year increase of 26.3 percent. Meanwhile, the pace of land development slowed. From January to June, a total of 79.2 million square meters of land was developed for realty, 28.5 percent lower than the figure in the same period last year.

"Now that the land and capital for realty development have plummeted, the supply of commercial buildings is bound to decline. In light of the relatively stable demand, it is only natural to see a hike in housing prices," Pan says.

According to Liu Xiaoguang, Deputy Board Chairman and General Manager of Beijing Capital Group, one reason for the price growth is the rising price of land. In the second quarter this year, the cost of land was 4.1 percent higher than that in the first quarter. More specifically, the price of land for realty development jumped 12.2 percent from the figure in the same period last year and is 3.2 percent higher than that in the first quarter. "The hike in housing costs early this year resulted from the soaring price of land last year. Escalating land prices this year will drive up the price of houses, causing a vicious cycle," Liu suggests.

Yi Xianrong, research fellow at the Institute of Bank and Financial Studies under the Chinese Academy of Social Sciences, asserts that the reason for expensive living space is that government macro-control policy is ineffective. "Although policies on regulating the land market and reducing loans to real estate developers were formulated and carried out, they hardly had any significant influence on the realty industry."

Yi believes investment in real estate development has indeed slowed compared with last year due to macro-control measures, but it is still growing rapidly. Investment in the first half of this year grew 28.7 percent over the same period last year. Given such a high growth rate, the housing price is unlikely to go down.

A bad sign

Statistics from the China Logistics Information Center show that the price of steel in China has noticeably picked up in the past few months. Average prices have climbed to 3,800 yuan (US$458.94) per ton, about 1,000 (US$120.77) yuan higher than the price two months ago.

Yi warns, "The increasing investment into the real estate sector and the rising housing price have resulted in an increase in the price of building-related products. We should be alert to this tendency."

According to Yi, the real estate industry has been one of the driving forces of the Chinese economy in recent years. In 2003, the fast growth of investment in the sector brought about rapid expansion in iron, steel and cement industries, which caused economic overheating. Government macro-control measures have reined in, at least partially, those sectors. However, the root cause for the overheating in iron, steel and cement industries, as well as excessive growth in the real estate sector, has not been effectively addressed. Yi suggests that the most pressing economic task currently is to guard against price rises in the real estate sector to prevent overheating from reoccurring.

Government's response

The continuous rise in the price of residential houses has attracted attention from related government departments. The People's Bank of China (PBC), the country's central bank, released the Second Quarter Monetary Policy Implementation Report on August 9, expressing the bank's concern over the rising costs of housing.

The report indicates that the continuing decline of investment into real estate development and of the area of newly started projects may exacerbate the supply-demand imbalance in that sector. This will push up housing prices. Accordingly, close attention must be paid to the price of real estate properties.

The Ministry of Construction has held a number of seminars to discuss the issue and is currently monitoring the housing price across the country. An official with the ministry disclosed that the ministry would take measures to stabilize housing prices once they went beyond the limits set by the government. He did not disclose the specific limits, however.

Experts point out that housing prices are usually four to six times above the average annual household income in developed countries, whereas in most Chinese cities, housing costs over 10 times the average annual household income. In a few cities, this figure is as high as 20 times. According to statistics, in the first half of 2004, the per-capita disposable income of Beijing residents averaged 7,836.4 yuan (US$946.43) and the per-capita spending was 5,748.7 yuan (US$694.29). These two figures in Shanghai stood at 8,513 yuan (US$1028.14) and 6,329 yuan (US$764.37), respectively.

Official sources reveal that apartments in Beijing are selling at 4,900 yuan (US$483.09) per square meter on average and 5,100 yuan (US$615.94) in Shanghai. However, the actual per-square meter price could be as high as 5,500 yuan (US$664.25) and 6,000 yuan (US$724.64) on average, respectively.

Tan Qinglian, President of China Civil Engineering Society and former Vice Minister of Construction, said that for 80 percent of the Chinese people, an apartment that expensive is not proportionate to their income.

In its newly released report, the PBC vows a study of the real estate market in major Chinese cities. On the basis of this, different policies will be adopted in accordance with local conditions to ensure the sustained and sound development of the real estate market.

(Beijing Review September 1, 2004)

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