By Xià Bīn (夏斌)
Editor’s Note: This article was distributed by a Chinese government accepted source, but we believe it is worthy of a wider audience because it provides documentation of important ongoing dialogue within top circles in China unavailable elsewhere.
The current situation of the real estate market is very serious.
On a year-on-year basis, real estate development investment, which accounts for a quarter of the country’s investment share, fell 5.4% in the first half of this year. The area of real estate sales fell 22.2%, housing sales fell 28.9%, and the area of new construction fell 34.4%. Land acquisition area fell by 48.3% on top of last year’s negative growth. From land purchase, construction start to sales, several key indicators of the link at the same time a serious negative growth, I am afraid is not in the history.
At the same time, governments around the world have wanted to ease the regulation of the real estate market, has appeared from the past strict regulation of the “three limits” “four limits” “limit up order” to today’s “limit down order”.
Rotten buildings and broken loans have broken out frequently. Relevant institutions research, as of July 16, 200 rotten buildings, involving 87 housing enterprises, involving 79 cities. If not for the timely voice of the regulatory authorities and local governments, if not for the timely stopping of relevant information by the network management department, the phenomenon of rotten buildings and broken loans will further ferment and spread, and there will be an unmanageable scene.
What do you think about this development? Will the national real estate market bubble burst? What will be the trend of the real estate market in the second half of the year and in the future?
I. How did China’s real estate market go from the boom of the past to what it is today?
What is the underlying logic of the rapid, large-scale development of China’s real estate market over the last 20 years?
First, it is linked to and developed in combination with the long-term Chinese economic growth model. Since the reform and opening up, rapid economic growth has required massive investment and a large amount of capital. The institutional background at that time was: first, the implementation of the tax sharing reform in 1993, which included a provision allowing the revenue from the sale of land for construction to go to local governments; second, the cessation of welfare housing in 1998 and the promotion of the commercial housing market; third, the “Land Management Law” in the same year, which stipulated that the conversion of collective land to construction land must be done after land acquisition The third, in the same year, the “Land Management Law” stipulates that collective land must be converted to state-owned land after land acquisition. These three articles laid the institutional foundation for the subsequent rise of the real estate market. That is, they provided a strong supply incentive to sell land and build houses. However, these effects were not perceived or apparent when the system was first introduced, because there was not yet a large demand for land sales to build commercial housing.
With China’s accession to the WTO at the beginning of this century, exports, investment and economic growth accelerated. Attracting business and investment required massive land acquisition and sales. The influx of population into cities, commercial housing and urbanization construction funds required massive land acquisition and sales, and the income from land sales provided funds for urban infrastructure construction. The improvement of urban infrastructure further attracts foreign and domestic investment, which expands investment and accelerates economic growth, while accelerating population influx and residential demand, which stimulates the rise of housing prices.
At this point, real estate companies took the land and were in a position to seek greater capital leverage from banks, further stimulating the rise in housing prices. As a result, house prices kept rising and land prices kept rising. In the context of rapid economic growth and accelerated urbanization, together with the profit preference of bank funds, continued to promote the rapid rise in house prices and land prices in turn, and so on in a continuous cycle of development.
During the 20 years of development, China’s economy has made tremendous achievements, and the Chinese real estate market, embedded in the country’s growth miracle, has undeniably made remarkable achievements, improving the housing conditions of China’s urban residents. At the same time, real estate companies have made a lot of money, and local governments have fallen into the pit of land finance as they continue to develop. 2021 land revenue accounts for up to 78% of local general public budget revenue, and the phenomenon of “six wallets cannot afford a suite” has emerged among ordinary people.
Secondly, in the subjective understanding of macro policy-making, for more than 20 years, despite the compulsion to adjust the housing market for many times, but in the face of the trajectory pressure of the once great situation of rapid economic growth, for a long time, stable growth is paramount, leaving the high investment including housing investment, China’s economic growth rate can not be stabilized. Therefore, in view of various reasons, China’s economic restructuring is difficult and long-term adjustment is not in place. The policy on whether housing properties are consumer-led or financial asset-led is wavering and unclear, and the measures on adjustment are weak and imprecise. The real estate market policy adjustment and the delayed structural adjustment of China’s economy have been “tied up” for a long time. Various problems have been accumulating. Last year, with the “three red lines” of banks as the trigger, its impact slowly passed, eventually leading to today’s “drop limit order” and “loan cut-off wave”.
Can the current pattern of “high prices and fast growth” continue?
As a conclusion, this model has come to an end and cannot go on.
One of the reasons, some cities housing prices remain high. Six wallets can not solve the social livelihood and stability problems caused by a suite, the time has come to have to solve.
The second reason is that, from the statistical data, at the beginning of the reform in 1978, the per capita housing floor area of urban and rural residents was only 6.7 square meters and 8.1 square meters respectively. After that, the real estate market developed rapidly for 20 years, and in the seventh census in 2020, the per capita housing area of the country reached 41.76 square meters, which was only lower than that of very few developed countries such as the United States, Britain and France.
According to the relevant institutions, the number of urban housing units nationwide increased from about 31 million to 362 million between 1978 and 2020. The set-to-household ratio of the number of housing units to the number of households rose from 0.8% to 1.09%, second only to the United States and Japan and higher than France and the United Kingdom at 1.03, indicating that the current housing supply and demand in China can be said to have been generally and basically balanced from the total perspective. Especially from 2015 to 2018, the Chinese government has invested 500 to 600 billion yuan to accelerate the transformation of shantytowns, further expand and improve the supply of low-cost housing and public rental housing, and reduce the marginal demand for housing for low-income residents in the housing market, which has more contributed to the basic balance between supply and demand of housing nationwide. Especially with the increasing urbanization rate and aging population, the inventory of houses in third and fourth-tier cities has increased significantly, and the problem of oversupply is gradually becoming prominent.
Reason number three, for a variety of reasons, the real estate market in the past was not strictly regulated, many real estate companies do not comply with the law, misappropriation of funds, desperate expansion. When the banking industry to strengthen the prudential supervision of the “three red lines”, resulting in some housing enterprises debt frequently “burst”, some enterprises are on the verge of bankruptcy. The shortage or depletion of funds to buy land, the power to blow the housing market bubble is naturally weakening.
The fourth reason is that local finance has fallen deep into the “land finance” pit, can not go on. Land finance accounted for 78% last year, but land auction revenue in the first half of this year fell 31.4% over the same period. For a long time, there are tens of trillions of hidden debts on local financing platforms that have not yet been resolved, many of which are secured by land revenue. The risk of local hidden debt, which is particularly prominent in the current systemic risk, is not handled well and will seriously affect our social and economic security. Now one is that land revenue is decreasing, and the other is that the serious problem of local hidden debt risk is bound by the current regulations can no longer be expanded blindly. Land finance has come to a period when it has to be solved, and therefore will bring fundamental changes to the long-term development of the housing market as well.
Therefore, from the trend point of view, from a national perspective, the bubble in China’s real estate market will not and should not get bigger and bigger, and China’s housing prices will not and should not get higher and higher. China’s housing market, which has been developing for more than 20 years, will truly take a historic turn and begin to move into the fast lane of development from a housing investment-oriented to a consumer-oriented market.
Third, what’s next?
1, in the direction of the development of the real estate market, we should reintroduce and return to the principle of “dual-track housing system” in the 1998 real estate market reform program, adhere to the principle of “housing is not speculative” proposed by the central government at the end of 2016, and firmly grasp the real estate market. The development direction of the real estate market is consumer-led. To this end, we must first carefully analyze and learn from the lessons of the past, and take emergency measures to cope with the immediate short-term problems. At the same time, we must make great efforts to develop long-term mechanisms and systems.
In the real estate market regulation should be clear four principles: (1) the real estate market is still a pillar industry in the future, we should strongly support, but the development of the pillar industry should also be measured; (2) real estate policy is certainly part of the macro-control policy, but the government should self-restraint, should not be real estate policy as the main tool to balance the stable development of the economy, the use of real estate regulation policy should focus on the long-term, beware of myopia (3) “housing” is the people’s livelihood, is the bottom line of the housing market development, must be firmly guarded, priority arrangements, placed in the development of the housing market in the first place; (4) “housing is not speculative “To promote the transformation of housing from investment-oriented to consumer-oriented is the long-term direction.
In view of the long-accumulated bubble problem in the current real estate market, the problem should be solved by considering the acceptability of the whole society at the moment, giving enough time for the society to digest, emphasizing the water to the water, and avoiding major social unrest.
2, in view of the obvious fact that the real estate market has kidnapped China’s economy for a long time and it is difficult to solve the problem in a more thorough market way in the short term, we should strive to speed up the implementation and basically solve the basic needs of low-income people and migrant workers in the city for “housing” in two years. Provide them with a continuous supply of public rental housing and guaranteed rental housing.
Some of the housing sources can be tapped by the government through policy means to the housing stock of the existing state-owned government agencies, enterprises and institutions, as well as the restructuring of the upcoming “bad buildings” project. Through the appropriate renovation of various buildings, the housing needs of those who lack the ability to purchase a home can be met as soon as possible. At the same time, we should refine our rental policies to protect people’s livelihood, such as the maximum limit of rent, various protective clauses for customers (e.g. tenure, etc.), relevant tax incentives, etc., and encourage social policies that support rental housing in all aspects.
3, pragmatic, classification of the current “rotten buildings” “broken loans” problem, to ensure the basic stability of the national real estate market. In the face of more than 200 known rotten projects, nearly 100 real estate enterprises of rotten buildings “broken loans” problem and may lead to the spread of the national real estate market systemic risk problems, must be timely containment. By the central bank and other financial institutions first take money to rescue is necessary, but must pay the price, not a waste of financial resources.
In the specific treatment of some housing enterprises with sound corporate governance, mainly not caused by the housing enterprises themselves due to the lack of liquidity caused by the “rotten” problem, the local government and the bank to coordinate and take appropriate restraint measures to give timely merger and acquisition financing and other liquidity support to ensure delivery of buildings.
For some illegal and illegal operation of the real estate companies, the actual insolvent project companies, should be through the pressure of the local government to take the lead responsibility to coordinate banks, asset management companies, third-party market institutions, etc., “a project a program”, the project company to take over, debt or equity restructuring, mergers and acquisitions and other various ways to inject policy funds and market After the delivery of the building, the insolvent property companies are declared out of the market. As for the choice of which real estate companies to give different ways to “guarantee the delivery of buildings” rescue, can not be divided by the head of enterprises, non-head enterprises, not state-owned, private enterprises, but should uphold the market principles, according to corporate governance and project company business quality.
In short, do not waste the opportunity of this local crisis in the real estate market, in keeping with the premise of preserving the delivery of buildings and stabilizing society, must restructure and transform a number of real estate companies, must bankrupt a number of long-standing poorly run, insolvent real estate companies. The above is the principle, the specific how to deal with the risk, as long as the government bailout funds, must comply with the national unified guidance program, for this reason, the government should come up with a solution to resolve this wave of housing market risks as soon as possible.
4, while organizing special forces to study the long-term mechanism and policy system for the healthy development of China’s real estate market. In the spirit of the principles of encouraging rental housing, supporting just-needed and improved housing, and combating speculation in housing, we will study a coordinated policy system in many aspects, such as taxation system, pre-sale payment system, down payment ratio, mortgage interest rate, and linkage between people and land.
In the study process, we should allow comprehensive listening to the views of the society in many aspects, give the whole society time to digest, let the whole society gradually form the social opinion of “housing is not speculative”, gradually reduce the speculative investment demand for commercial housing at the margin, restrain the high price of housing, make the real estate market gradually converge to the standard development, after a period of time, the water comes to fruition, give The long-term mechanism system will be introduced to allow sufficient time.