Housing Prices Challenge China's Reforms

An analysis by Michael Lelyveld
china-high-rise-nov-2013.jpg New high-rise residential apartment buildings under construction in Lianyungang, Jiangsu province, Nov. 18, 2013.

Eight months after taking office, China's new government is still struggling to bring housing prices under control.

Despite a series of measures since March, prices have kept up their relentless climb, frustrating first-time buyers and the government's urbanization drive.

In October, 65 of 70 surveyed cities reported higher new home prices, according to the National Bureau of Statistics (NBS).

The increases in China's four largest cities were the biggest since January 2011, Bloomberg News said.

Price hikes from a year earlier ranged from 16 to 21 percent in Beijing, Shanghai, Guangzhou, and Shenzhen, the NBS reported.

In November, prices rose again in 69 out of 100 cities in a China Index Academy survey, Shanghai Daily said.

Sharing economic benefits

The price issue is critical for the government on several levels.

The first is public demand that economic benefits be shared more evenly.

Property costs have been spurred by speculation and investment among the well-to-do in second and third homes, while many first-time buyers have been priced out of the market.

Last month, the official Xinhua news agency cited public expectations that government reforms would bring prices down, based on responses to a China Youth Daily poll.

High prices may also hinder the government's effort to draw some 20 million rural dwellers a year to China's cities.

Excessive investment in unoccupied high-end housing may also create an economic bubble, while unneeded construction adds to environmental woes.

Curbing speculation

In March, the State Council called for a 20-percent capital gains tax on profits from home sales, hoping to curb speculation.

The move was seen as the incoming government's first attempt to cool off the property market and make housing more affordable for the middle class and new entrants to China's cities.

But implementation of the tax was left to local governments, creating a patchwork of rules, largely affecting second homes for investment and costlier residences.

New tactics

Now that prices are apparently undeterred, cities are trying a host of new tactics to meet the government's goal of stabilizing the market by the end of the year.

On Nov. 18, Guangzhou announced that it would require down payments of at least 70 percent for second-home purchases following similar moves by the other megacities, Xinhua reported.

Apartment sales to unregistered residents have been restricted to deter speculation, "but the rules have not yet yielded fruit as expected," the news agency said.

Other tactics include a ban on "presales" of more expensive properties, expected to take effect in Beijing. But such moves are seen as only postponing higher prices when the homes under construction are eventually sold.

Cautious measures

Officials seem uncertain about how to manage the market or even whether to interfere with supply and demand.

In the first 10 months of the year, home sales soared 33 percent as Premier Li Keqiang held off from imposing new national restrictions out of concern for economic growth, Bloomberg said.

"The property industry is the supporting force for economic growth and economic structural reforms, and the fact has not changed," said economist Ba Shusong of the State Council's Development Research Center, writing in the Shanghai Securities News.

Property tax

So far, the government has appeared cautious about pushing a property tax, which is seen as the most powerful tool to rein in speculation and multiple home ownership.

Property taxes have been tried as pilot programs since last year in Shanghai and Chongqing, but it is unclear whether the limited measures, mostly for high-cost properties, have had much effect.

Central government officials have voiced the same set of concerns about expanding the tax into a national requirement.

"Property taxes impact the national economy and people's livelihood, and an expansion needs to be discussed more widely," an official of the State Administration of Taxation said in January, Xinhua reported.

Plenum roadmap

A document released following last month's Third Party Plenum suggests that reluctance and caution continue.

"Also, accelerate property-tax legislation and related reform at an appropriate time," a section from the government's roadmap reads.

The property tax is still seen as the effective way to curb the speculative run-up in housing, said Harvard University economics professor Dale Jorgenson in an interview.

"It's pretty clear that's the way they have to go. It's a little complicated, but that's the bottom line," he said.

Jorgenson is not discouraged by the vague wording of the plenum's roadmap, noting that previous Chinese reforms since 1978 were preceded by similarly general outlines.


Still, imposition of an effective property tax measure may run into bureaucratic foot-dragging.

"Despite the fact that they have an authoritarian system, there is going to be a lot of resistance of one kind or another," Jorgenson said.

He believes resistance is the reason the government has created a new "central leading team" to pursue its agenda.

"That is something that is going to deal with these issues by going out and, if necessary, by knocking a few heads together," Jorgenson said.

But even with a determined push, housing reforms will take time.

Land reforms are also key to the issue, said Jorgenson, since urban expansion may rely on land now classed as rural, which will be subject to its own property rights reform.

For starters, the government is launching a "cadastral" survey of boundary and property lines that could take two to three years to complete, he said.

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