The Ministry of Finance, in conjunction with the State Property Bureau (国土部) recently enacted a policy requiring real estate developers to provide a 50% down payment on all developments (both commercial and residential), ostensibly to address concerns about property developers using low interest rate loans to buy up large amounts of land and hold it as it appreciates (from 地产中国网, “China Property Net”):

As of December 17th, the Ministry of Finance, State Property Bureau and related agencies issued the “Further Strengthening Land Sell Revenue Expenditure Management Notification,” which explicitly states that when property developers purchase land, “when purchasing using a segmented payment, a developer must pay the entire account within one year, or within two years for special projects; and the developer must make a down payment that is no less than 50% of the total prices.” If property developers are in arrears on other accounts, they must not undertake any property transactions.

12月17日，财政部、国土部等五部委出台《进一步加强土地出让收支管理的通知》，明确开发商以后拿地时，“分期缴纳全部土地出让价款期限原则上不得超过一年，特殊项目可以约定在两年内全部缴清，首次缴款比例不得低于全部土地出让款的50%”。如果开发商拖欠价款，不得参与新的土地出让交易。

Other reports note that: six property developments in Hangzhou (since December 17) did not meet the 50% required; Hangzhou officials said they would enforce the practice starting in the New Year. Furthermore, the “special two year exemption” does not require the 50% minimum down payment for loan financing. The designation of “special project” is presumably awarded by local / regional state property bureaus, and the article argues that the policy wont have much of an impact on status quo property financing. Not sure if this is notable, but all of the articles discussing the topic use the term 口子 (‘window’) to describe the special project exemption, a much more positive term than 漏洞 (‘loophole’), leading one to think that decision makers intended for this to have soft teeth. Populist policy appeasement mechanisms in a market-authoritarian context = dissertation paper!

Over the vacation, I was afforded a chance to catch up with several good friends, two of whom were young Chinese men, entirely independent of each other yet featuring eerily similar stories: “My girlfriend wants to live in Beijing; and in order to move forward with the relationship I need to buy a house. Beijing house prices are crazy, so I have to buy a house here so that they’ll move back. I can’t afford to wait until prices drop. What would I do, rent for 10 years?” I went over the various ratios that one might consider when attempting to determine property valuation (affordability indices, rent/purchase price ratios, secondary market prices), trying to convince both that buying a house would be a horrible investment, though there’s obviously more at stake if you need one to convince your girlfriend to live with you. Both responded, “even if it is, I have to buy one.” There is some justification for buying a new flat to obtain the 70-year ‘land usage right;’ purchasing a flat on the secondary market would transfer the ownership rights, which are necessarily less than 70 years, and therefore might be an issue within the purchaser’s lifetime.

Such stress results from the entire situation, and yet if you walk around (1st tier and 2nd tier cities), the number of dark apartment flats at night are staggering. I would take a picture to illustrate the point, but you really wouldn’t be able to see anything. It can’t simply be that everyone keeps the lights off at night (contrary explanation: there are people living there but they can’t afford electricity to service expensive mortgages on a Rmb8,000 month combined salary).

Yves Smith at Naked Capitalism has an excellent summary of the situation, which squares with what I’ve observed here thus far:

Some people may be engaged in short-term ”flipping,” but as I’ve described in my FEER article “China’s Real Estate Riddle,” a lot more are buying residences — in many cases multiple units — and holding them vacant indefinitely as an unproductive ”store of value,” like gold. As I mentioned in my article, the Financial Times estimates that there are 587 million meters of apartment space that buyers have purchased over the past five years only to leave lying empty (for a concrete notion of what this statistic means, take a look at Al Jazeera’s report on Ordos). This puzzling phenomemon is due to the fact that Chinese citizens have relatively few investment options, and China’s real estate sector (unlike its stock market) has never experienced a sustained downturn since the country converted to private home ownership in the mid-1990s. The fact that China has no annual holding tax on property means there is little penalty for letting property lie idle, in the hope that it will appreciate or at least retain its value. The result is an inflated market where the demand for property as a pure investment vehicle far outstrips the demand for affordable, usable space.

… What we see in China, though, is an extremely weak secondary market. In the U.S., the ratio of secondary to primary residential property transactions for the first half of 2009 was 13.45; in Hong Kong it was 7.25. In China as a whole, that ratio was 0.26 (four times as many new home purchases as secondary sales). Even in China’s most developed markets the ratios were just 1.30 for Beijing, 1.56 for Shanghai, and 1.35 for Shenzhen. [Keep in mind that an immense quantity of existing housing stock was privatized in the 1990s, at nominal prices, so the explanation cannot be simply that China is a "new" market -- China actually has a higher rate of established home ownership (80%) than the U.S. (70%)].

Poor young Chinese men. In the best case scenario: study 160 hours a week to get into a decent university, don’t have time for girls. Go to university and live with six other dudes, don’t have place to bring girls. Graduate from university and try to find a job and start saving for a home, since until you buy one very few women will agree to exclusive mating arrangements.

* With regards to the New Ordos story: on my walk to work several weeks ago, there was a little stand on the sidewalk where a woman was passing out information on ‘moving to New Ordos city.’ Did not investigate. Should have.

The supreme ‘going native’ move would be to marry a Chinese lady. Normally this seems like an inexpensive option for language immersion. Potentially not so price neutral though, since housing is expensive here, as this blog post elucidates: “House Prices are so high that even foreigners won’t dare to marry Shanghai girls”. The post concerns an anecdotal account of someone’s neighbor’s daughter who fell in love with a “young fellow” from Holland, but the two were unable to get married because he couldn’t buy a house. The following scene occurs after the young man reveals to his lady-friend’s parents that he cannot afford to buy a house in Shanghai (translation by me, tilted towards literal):

… The Young Dutch Fellow was embarrassed for being so poor, but it was finally apparent to the Shanghainese mother-in-law, that the young lad wondered if it would be alright to use a mortgage to buy a house. Her expression became livid, a foreign son-in-law buying a house would only happen once, how could he get a mortgage? After saying that he lost face – he was just a poor foreigner! The mother-in-law didn’t answer, and this Young Dutch Fellow Little Foreigner was unable to do anything, he was helpless as the time drew on, and the mother-in-law was unable to bear it, and started spreading gossip among all the neighbors everywhere about the “poor foreigner.” The father-in-law was afraid that the son-in-law would lose face and so explained: “It’s not that the foreigners have become poor, it’s that Shanghai house prices are high! They have already surpassed international levels, so even foreigners don’t have options.”

荷兰小伙子囊中羞涩的窘态，终于被上海丈母娘看出来了，因为小伙子语焉不详的试问，好不好先交个首期按揭买房。上海丈母娘脸色铁青，老外女婿买房都是一次过，哪有按揭的？说出去多丢人啊，那不是嫁一个穷老外了。丈母娘没答应，这荷兰小老外真没辙，磨磨唧唧的没办法，时间一长，丈母娘忍不住了，到处和邻居街坊说，张嘴闭嘴就是“穷老外”。老岳父怕给女婿丢脸，赶紧圆场说：不是老外变穷了，是上海的房价太高了，这超过国际水平了，老外有什么办法。

There seem to be some other issues here, since there’s no particularly delicate way to say: “Oh… I’m maybe not so confident in the property regimes of your land…” or “I am maybe not so confident in the quality prospects of this city’s constructs…” (which the author addresses, noting that “prices are similar to Amsterdam’s, but there couldn’t even begin to be a comparison on quality”):

Beyond that, however, buying a house in Shanghai (except for the very outskirts) is a fool’s prospect, at the moment. Price-rent ratios / Average income-price ratios are all messed up. From a pure cost-benefit perspective, our ‘young Holland fellow’ would be much better off renting. Buuuut you have to own a place to get the lady.

The author’s point is simply that ‘being foreign’ is typically seen as a proxy for wealth (hah! Joke’s on you! We just lost all our money!) and in citing this example he further elucidates how out of control the Shanghai property market is. There are, however, two sides to every coin as one of the commentators notes:

Shanghai’s house prices continue to rise, or else all beautiful Shanghainese girls will be abducted by foreigners!!! ok!!!1

上海的房子继续涨啊，要不上海美女都被老外拐走了！！！ok!!!!1