Bubbles from 'stir-frying' houses
By Yi Yianrong (China Business Weekly)
Updated: 2004-05-11 09:22

In that time, a group of property speculators from Wenzhou in East China's Zhejiang Province has emerged and is attracting a lot of attention.

Disputes and doubts

The well-financed group usually buys a lot of houses at one time, and sometimes several buildings or houses in one area, and then sells them at higher prices. Wherever the group goes,local house prices skyrocket.

Their buying is not limited to Zhejiang Province, and they have purchased a considerable number of houses in eastern cities such as Beijing, Shanghai and Shenzhen.

Various opinions have been formed about the house buyers.

Some look down upon on them. They maintain the groups are no more than speculators who are manipulating the local real estate market, making very good profits and creating a bubble in the economy that is expected to break eventually.

Others, however, think highly of them. In their opinion, they think the real estate market will be pushed forward, and GDP (gross domestic product) and tax could be increased as well.

Although the pros and cons do make sense, none is not grounded on the assumption that the domestic real estate market is well developed, with clear title and open competition.

Given such a background, who dares say that these activities which I may term stir-frying are not legal?

However, how about China's real "real estate market''?

Is the market perfectly legal? Is it fair competition? Who may possess land? Who takes the leading role in growing land prices? Who gets the eventual profits? Who are the victims?

Monopoly and price rigidity

The present domestic real estate market is monopolized instead of being well-developed and competitive.

Basically, any enterprise that wishes to become a player in the real estate market is required to own land.

Suppose that the land market is a normal, public and transparent one, then the government could provide lands in a continual and moderate way, and so balancing supply and demand.

Revenues obtained from land sales could be managed well by the government, thus preventing land sellers from making exorbitant profit.

However, traditionally selling and buying land in China is done through private contract.

Only a few cities, such as Guangzhou, use auction or bidding.

Over the nine months starting from the issue of the Ministry of Land and Resources national No 33 circular in 2002 relating to land to the similar Beijing government's No 4 circular in February this year, the amount of land sold through contract in Beijing equalled that of the land used for housing during the 10 years before the issue of the No 33 circular.

Therefore, land is being monopolized by group or individual real estate developers, enterprises sharing common interests with the governments, or those with special backgrounds.

The contract method destroys market-driven price mechanisms, making it possible for "unqualified" developers to easily buy great amounts of land and make very good profits.

Furthermore, some local governments, for the purpose of expanding local financial revenue, limit local land supply, thereby speeding up the imbalance between demand and supply.

With such a background, there are only a few developers who may enter the real estate market.

When demand exceeds supply in the market, developers are under no pressure.

However, as demand falls short of supply, there is fierce competition among developers, and house prices go down, not the result the developers expect or want.

As a result, motivated by keeping the prices of houses high and by making greater profits in the real estate market, the developers collude about house prices following a so-called leader-oriented rule.

That is, the developer who first entered into the market has the right to set the price, and successors can do nothing but follow it.

If anyone initiates a drop in price, the others combine forces to attack him.

Apart from that, as the developers always anticipate increasing housing prices, the consumers are misled and manipulated.

People even raise doubts about the quality of houses sold at lower prices.

The collusion on prices advances the monopolization of the real estate market, making it possible for real estate developers to profiteer and do harm to consumer interests.

Stir-frying: effect and essence

As a result of large-scale buying operations, housing prices in some areas are artificially inflated, which paves a way for developers to make handsome profits.

Obviously, real estate developers and Wenzhou purchasing groups mutually benefit.

In a recent survey of the Top 100 Richest in China, those engaged in real estate industry make up more than 50 per cent, compared with only 6 per cent internationally.

What domestic developers and stir-frying speculators get comes from what the consumers lose.

As house prices are kept at a fixed high level, consumers with low or medium income suffer greatly.

Those with mortgages are loaded with the heavy burden of paying back a lot of money on time.

Most people, however, can hardly see any hope of buying their own houses.

Therefore, speculation speeds up the growth of the gap between rich and poor, arousing social disharmony and turbulence.

In such a monopolized real estate market, those who make the biggest profits are developers, especially those individuals or groups with special backgrounds, who first buy land from the government at a low price, and then sell them on higher.

The government stands next to the developers in terms of profit.

By selling land, the government increases domestic financial revenue.

Meanwhile, GDP together with tax have been fuelled by real estate industry development. Banks play a third role. As house prices flare, consumer welfare decreases.

Therefore, it is unreasonable to blame house-purchasing groups. They are not the problem and it is misleading for the public.

What is the essence of stir-frying?

First, stir-frying increases the disparity of wealth. A few speculators make huge amounts of money and most common people sustain great losses.

This runs counter to the human-oriented values of scientific development advocated by the central government of China.

Second, stir-frying can result in disastrous consequences.

Generally, capital used for house purchases is accumulated from domestic banks.

If something similar to the Asian financial crisis of 1997 recurs, house prices will fall.

The rich from Wenzhou will quickly turn to rags, and the speculators won't be able to pay back their loans. Then banks will have to shoulder an enormous burden.

In conclusion, we should not let the stir-frying continue.

The government should set restrictions on stir-frying so as to normalize the real estate market.

This would alleviate the symptoms.

Furthermore, the government should strengthen its supervision and issue regulations on land sales and prices as well. This is really the permanent cure.

The author Yi Yianrong is an economist with the Institute of Financial Research affiliated with the Chinese Academy of Social Sciences.

Close