The Chinese government tries to curtail irrational investments, but domestic real estate is certainly not at the hackblock, says real estate expert Sam Crispin in Knowledge GKGSB. The government cannot afford to kill the goose laying golden eggs, he says.
Driving the rapid price increase are investors piling into the market. A dramatic stock market rout in 2015 in particular left many seeing property as one of the few secure investment options available on the Chinese mainland.
“There are few investments products that offer the same degree of
security as real estate,” says Sam Crispin, CEO of ABP Investment Management in Hong Kong.
China’s banks also see property as a secure bet. About half of all new lending in 2016 went into real estate, largely through mortgages with bank loans to developers and homebuyers totaling RMB 26.68 trillion ($3.87 trillion). This was up 27% from 2015, according to data from China’s central bank. Agricultural Bank of China, the country’s third-largest lender by assets, had 82% of its new loans go to housing…
Property development and apartment sales are also key sources of revenue for local governments, so they have an incentive to keep land sales going. According to the Chinese business magazine Caixin, income from the sale of land-use rights totaled RMB 3.75 trillion ($551 billion) in 2016, nearly 30% of the combined annual income of local governments, with some areas depending on sales for as much as 50% of their revenue.
“Property is the goose that lays the golden egg,” says Crispin. “They (governments) are dependent on that revenue stream—if they lose it what will take its place?”
A tense standoff lasted for months as the government grappled with a precedent that had national implications. In late December, it was announced that the Wenzhou leases would be rolled over free of charge, which kicked the issue down the road but left the core issue of ownership rights unclear.
Such uncertainty, long-term, is a destabilizing factor. “[A bursting bubble] would be catastrophic for the Chinese state,” says Crispin. “The government is in control of land sales, the government is in control of construction, the government basically sets prices by approving the pricing of sales… so it’s the government’s fault if it goes wrong. They have no mechanism to cope with [a crisis].”
Measures implemented in recent years have tried to cool down the market. These include raising minimum downpayments, which can be up to 80% in major cities, and outright restrictions on home purchasing, for example by making it illegal in some places to buy a second apartment.
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