CHINA: A man's home is his castle-in-the-air in China

Created: 2010-4-7, Updated: 2010-4-6 22:34:04

Author:Jacob von Bisterfeld

"AN Englishman's home is his castle," or so the saying goes.  For many Chinese people, these days, their coveted future home appears to be priced like a castle, totally out of reach for most young people under their own steam.

Sure, some young couples do manage to move into new digs but more often than not with gargantuan efforts from both parents and/or grand parents who had been lucky enough to raise substantial mortgages on their continuously appreciating real estate.

In China, private property ownership became the norm, albeit hesitatingly, in the 1990s, when the majority of work unit-owned housing was sold for a token sum to all workers who had been employed for a lengthy period of time.

In 2002, it was possible to purchase a nice, new and modern 120-square-meter apartment at the perimeter of Century Park in Shanghai's Pudong for around 200,000 yuan (US$29,300). Newly built apartments in the same area of the same standard now cost easily 2 or 3 million yuan or more.

A more than 10-fold price increase in a mere eight years. Monthly salaries for most office workers in 2002 were about 2,500 yuan and are now, when pushing it a bit, 4,000 yuan.

A less than doubling of income and a 10-fold increase in apartment prices do not match. Building material increases amounted to about 30 percent in the same period. So, what went wrong? Well, a lot, actually.

The economy needed a boost, so bank loans became easy. Besides, there was quite a bit of cash sloshing around, both legitimate and money from the black and gray markets that was looking for investment projects.

And looking for investment projects they came, spearheaded by ultra-wealthy syndicates from the leather and shoe city of Wenzhou, Zhejiang Province, who bought up entire apartment blocks comprising 120 flats of 120 square meters in one fell swoop and, yes, with truckloads of 100 yuan notes (90 euro cents) which, much to many investor's chagrin, is still the largest currency note around.

A most appalling and sickening revelation in Shanghai Daily a few weeks ago showed a picture of some giant circular tower blocks with around 1,000 apartments standing empty since they were constructed in 2006. This calls into doubt that there actually IS a housing shortage. Far from it.

There may well be a frightening oversupply of apartments and houses. This abomination is repeated over and over again in most major cities in China. The result was (and still is) that the market is thus starved of new apartments for sale, driving up the market price beyond any investors' wildest dreams and becoming every prospective house buyer's nightmare.

Especially in the past five years, every man and his dog were buying new and second-hand real estate that was sure to double in price every three years or thereabouts. Several of my colleagues, and they are by no means wealthy people, own three or more (highly leveraged, with easy bank money) empty new houses, and they are awaiting the next doubling in property prices.
Is it thus more than likely that China is in for a repeat of the recent US burst housing bubble, probably only worse? Let's see.

In many Western countries, the income level of the average young couple is such that, with a minimal deposit, a mortgage and decorating loan can be paid off comfortably, within a period of 10 to 15 years.

In China, such repayments would not only consume the lion share of the couples' aggregate earnings, but also require a huge deposit and take 25 years or more to repay or, in many cases, beyond retirement age. China is a people's republic, but some real estate tycoons have spoken loudly that they will never build apartments for the ordinary people, they serve only the rich. What an irony.

No easy solution appears to be in sight yet. There are simply too many vested interests that would be hurt with any drastic change.
What can be done?

Clearly, the land-right sales price should be capped at 2002 levels or below. Taking cognizance of the fact that material prices and salaries have increased only moderately in the past eight years, new property prices resembling those of 2002 should be relatively easy to achieve.

Possessing more than one dwelling house or apartment, in most cases, is obviously for investment purposes and should be subject to progressive tax increases (the more properties, the higher the taxes). The tax structure should be such that affordable rental accommodation remains adequate.

Real estate profits, both for developers as well as individuals should be taxed at prohibitive rates to discourage speculation. En-block sales and sales of more that two units to the same buyer or extended family should be prohibited.

Banks should lower the minimum deposit rate for people with a steady job to 5 percent or 10 percent to make owning a property for most newly married couples a reality, rather than a pipe dream.

(The author is a freelancer in Shanghai. The views are his own.)

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