The uncomfortable truth in China's property market

Wed Nov 6, 2013 3:49am EST
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By Xiaoyi Shao and Koh Gui Qing

BEIJING (Reuters) - In defying four years of official cooling efforts, China's soaring house prices reveal an uncomfortable truth: government is one of the biggest obstacles to the success of taming the market.

State income is so entwined in the need for rising land prices that policy efforts to try to curb the house market create an inherent conflict of interest.

With one hand on a patchwork of controls aimed at taming record house prices, governments with their other hand are at the same time selling land to developers at rising prices.

Homes in cities such as Beijing are more expensive by some measures than Britain or Japan, a dismal outcome for a central government campaign aimed at making homes more affordable to Chinese. House prices in September rose nationwide at their fastest pace in three years.

"The starting point of local governments is to keep land prices relatively high," said Zou Xiaoyun, deputy chief engineer at China Land Surveying and Planning Institute, a research unit affiliated to the land ministry. "Governments are not willing to see home prices fall."

Selling land is a major source of income for local governments but other factors drive up prices as well. These include natural demand from a rising population, and speculation fuelled by ready cash, given relatively few alternatives for investment.

China's reform efforts, such as lowering government reliance on land sales for revenue and providing speculators with more investment options, should help iron out these factors. A meeting starting on Saturday of the country's top leaders will give clues about those reform plans.

Nowhere in China is the problem of a surging property market more acute than in Beijing and Shanghai, where the lure of good education and employment have underpinned demand as millions of Chinese are encouraged to migrate to cities.   Continued...

A motorist rides past banners hanging outside a residential community in Wuhan, Hubei province, October 21, 2013. REUTERS/Stringer