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Ren Zhiqiang: The New Deal of Property-purchasing Limitations is not Scientific
Ren Zhiqiang: The New Deal of Property-purchasing Limitations is not Scientific
Abstract: In order to control growing housing price, the Central Government has put forward a series of real estate control policies. On January 26, the State Council launched the "Eight Rules," among which the property-purchasing limitation is the most important restriction. As a follow-up, Qingdao, Beijing and Shanghai issued several detailed rules regarding "property-purchasing limitations". Real estate tax has been on trial for over two months in Chongqing and Shanghai. A property-purchasing limitation policy has been put into force in over thirty cities in the country. The housing sale in major cities has fallen, but the prices didn’t experience dramatic changes. On March 19, “BNU MBA Master Season” (Season 2) invited the president of Huayuan Group, Mr.Ren Zhiqiang to talk about “China’s real estate under the New Deal” with teachers and students of BNU. He made an in-depth analysis on the related rules.
● “The current housing market is still in short supply. It’s possible that housing prices will fall under the New Eight Rules.”
● “There’s no country that doesn’t regard real estate as a pillar industry. What we see as investment is tax in their eyes.”
● “All limitations are wrong. Non-targeted limitations are even worse. There’re many ways to combat speculation, but limitation is not the best one. Limiting buying is not as good as limiting selling.”
New Deal Curbs Housing Prices in a Short Term
It is estimated that in 2011, our macro-economy will fall after rise. GDP growth rate will be around 9% and it’s still falling after Japan’s earthquake. CPI is estimated to be 3.2% with the first half year being around 5% and second half year being lower than the first half. In addition, the reserve fund rate might be 21.5%. Currently, the reserve fund has been raised to a record-high of 20% and interest has been raised as well. The money supply will keep reducing which will greatly curb the economy. Therefore, the reserved fund rate might be fine-tuned three times and interest rates will keep rising.
In the short term, it’s not likely that housing prices will rise. After the New Deal was introduced, there have been some changes in the real estate market. In terms of supply, new housing in 2010 was quite large, totaling1.6 billion square meters. According to this year’s statistics, supply might be compressed compared to last year. So we may re-enter a state of tension in 2012—demand continues to grow, thus supply will continue growing for some time. Therefore, we cannot rule out the possibility of a slight increase in housing prices.
We first have to clearly understand the current status and policy regarding the housing market. The total supply of commercial residential buildings is fixed, either affordable housing or economic housing (both included). Among the total supply of housing last year, more than 380 million were renovated houses, which belong to urban housing. This year, urban housing takes up 10 million units, twice as much as commercial residential buildings. The proportion of private apartments through the housing reform keeps falling. According to the Ministry of Construction, privatization of housing will arrive at 89%. Thus, families without ownership of houses are comparatively few. And the remaining 11% include rental housing, so it is rare to find families without housing.
Everybody is saying that the Central Government is determined to combat speculative investment. But according to our statistics, we couldn’t find the evidence of speculative investment triggering the rise of housing prices. Nationwide, the proportion of families owning two houses is less than 12.3%, among which 68% are used for rentals, 25.8% are used once in a while and only less than 17% are used for other purposes. Therefore, the proportion of speculation is very low. Furthermore, the vacancy rate is also related. We interpret vacant houses as speculative investment triggering growing housing prices.
Scientific Analysis of the Housing Price Escalation Factors
We generally examine housing prices by comparing the housing price/income ratio. But according to international practice, housing price/income ratio has three factors: income median, price median and house acreage median. These three medians make a reasonable housing price/income ratio. But our scholars and most other researchers are examining average income, average housing prices and customized housing acreage, which is neither very scientific nor reasonable. Therefore, we have exchanged this process into a housing affordability index, which is also a universal concept. When the index is above 100, it means houses in this area are of investment value and the housing price/income ratio is low. If the index is below 100, it means that there’s a big gap between the housing price and income in this area. Most families can’t afford houses and more purchasing power is from the outside. Outside purchasing power might push up the price and then greatly lower the local housing affordability index.
The vacancy rate has been a hot issue. In fact, there’s a universal explanation regarding vacancy rates: empty houses refer to houses which are temporarily not occupied. In most cities, the vacancy rate is very low. But in several cities, because of personal mobility and other reasons, the vacancy rate is high. For example, the number hits 12.05% in Nanjing. But nationwide, the vacancy rate is around 3%. What’s the best rate? 10% is regarded the most suitable rate by international standards. When people come to see a doctor, study, or work, they need to live somewhere. If there’s no vacancy rate, that market will be forever in short supply. Because of issues resulting from personal mobility, these families can’t find necessary housing.
Does real estate have a promising future or not? If we compare China’s situation with other counties, we will find that the same thing happened about fifty years ago in the USA, Britain, Japan and Korea. Although in the Twelfth Five Year Plan, GDP growth rate has been slowed down, from the point of view of economic growth, it is a faster growing process. Currently, our urbanization rate is lagging far behind international standards, about 24%. Our total housing construction is far below the urbanization demand and also below the proportion in GDP. This leads to a serious short supply of housing. With the increasing average per capita income, the demand for for housing is also increasing, but our total housing construction doesn’t meet this demand, so the prices increase.
American textbooks discuss how housing demand is linked with the rate of family disintegration. When the rate of family disintegration increases, the housing demand increases. There used to be 17 people in a family and now there are 2 to 3 people in a family. And the proportion of families with only 1 to 2 members is also increasing. This is the contradiction between housing demand and population change. The characteristics of changes depend on population structure. For example, when young couples get married, there’s the so-called rigid demand. With the increasing of urbanization, we still need more than forty billion square meters of housing to meet the 70% urbanization rate. And what’s the number now? Probably less than 20 billion. How many houses do we still need to build? Double the existing basis. But this is almost impossible.
“Buying limitation is not as good as selling limitation.”
China’s serious housing shortage has led to the escalation of land and housing prices. The public wants to curb housing prices with property taxes, but it’s too early to let a property tax produce an impact on housing prices or people’s consumption behavior.
The newly-introduced property-purchasing limitation is actually a test for the Central Government. Among the 34 cities where the limitation is in effect, only eight of them cover the whole city. Many of them are restricted to urban areas. Some other cities are only restricted to some urban areas. Some cities are only restricted to registered residences or certain types of apartments.
The introduction of property-purchasing limitations is related to the growth of CPI and housing prices, as well as the introduction of property taxes. The property-purchasing limitation followed the introduction of New Eight Rules. It was obviously designed to tell people not to rush to purchase when the property tax came into force.
I think all limitations are wrong. Non-targeted limitations are even worse. What’s the aim of limitation? Many people say it’s to curb speculation on real estate. If the buyer doesn’t sell the house, is that called speculation? Speculation means selling the house to someone else, and the buyer actually doesn’t have a house. Therefore, “speculation” and “storing up” are two different concepts. The easiest way to curb speculation is to limit selling. If one is forbidden to sell, then how can he speculate? So, limiting selling can solve the problem of speculation. Limiting buying isn’t necessary because it will de-motivate many people who actually do have housing needs. There are many ways to combat speculation, but limitation is not the best one. Limiting buying is not as good as limiting selling.
A policy excessively reacted to will lead to a cyclical rebound. It’s hard to say that the world economy will experience some problem. The effect of this policy on the macro-economy is to reduce it because over-tightening will lead to the decline in investment and consumption growth. The Central Bank announced that China’s current consumer confidence index was the lowest since 1999. While investment and consumption are falling, CPI has been rising, which will lead to a decline in our GDP, thus resulting in the so-called ‘stagflation’, as economists often put it. Of course, we can’t rule out the possibility that economic growth will show some changes under macroeconomic policy adjustments. (BNU Newspaper reporter: Yin Qian, Bai Xue)