The developers should not be the only one to be blamed for the high house prices. Actually the property cost in China is difficult to be figured out unless the local governments are willing to sacrifice their vested interests in the industry.

According to the report, the National Bureau of Statistics (NBS) has issued  a notice to conduct a special survey upon the development cost of commodity houses in 40 major cities, in order to disclose the cost structure of the real estate development which has always been unknown to the public.

It is known that this survey covers the basic conditions, the number and the financial conditions of the real estate developers, as well as the cost composition of the real estate development. The targets are the real estate developers in Beijing, Shanghai, Guangzhou and some other major cities and their projects of commodity houses.

The disputes of house prices in China are always entangled with the cost of real estate development, which is hard to be clarified. Therefore, it is impossible to judge whether the house prices are reasonable or not. It seems that only the developers know the cost but they always keep silent on this topic.

The Chinese media thought highly of this survey conducted by the NBS. People all believe that it is time to disclose the composition of house prices and the huge profits of the real estate developers.

But some people think this survey will have worse achievements than people expect. In China, the cost of real estate development has been closely tied with the different local governments’ interests. Therefore, to disclose the mystery of real estate cost will face many hurdles and stress.

Determination of the NBS

According to the sources, the NBS requires to clarify the costs of land for commodity houses, urban basic construction, and building and selling the houses, as well as various taxes and duties, total areas of projects and total income of project sale. Those are just the information that is not included in the normal statistics of real estate.

Niu Dao, a specialist in real estate said that most of the statistics about these aspects is so confusing that even the people working out the statistics can not make it clear.

Niu Dao gave out three suggestions for the NBS if it really wants to make clear of the real estate cost. The first one is to conduct a survey upon the reserved land for houses in the whole country. This survey is essential to know land cost, which is a key to know the real estate cost. If the NBS starts the survey without knowing the situation of reserved land for houses, the developers will tell the surveyors the current land price, instead of the one when they acquired the land and began to develop the projects. It is stipulated that the government can take back the residential land which has not been developed for more than two years without any cost. But in truth, right now there is a large amount of residential land having not been developed for more than ten years. During those years, the land price has increased multiply and it is the same to the developers’ profits.

The second one is to conduct a survey upon the reserves of new houses in 70 cities of China. Some of the new houses are deliberately reserved by the developers. Therefore, the NBS should compare the cost of gaining the land for those houses with the current house prices. Actually, when the developers began to acquire land for building houses several years ago, the comprehensive cost might be only 3000 yuan (USD 439.7) per square meter. Now the house prices in some places may increase to 20 thousand yuan (USD 2931.4) per square meter. From these two data we can see the huge profits of the real estate developers.

The third one is to make clear of the real estate developers’ amount and source of capital in cash. Some small- and middle-sized development enterprises get money from the bank loans. The composition rate of a large amount of the developers’ capital in cash doesn’t conform to the stipulation of the country. The amount of capital in cash directly connects with the cost and plays an important role in disclosing the huge costs of the developers. It is also easier to be finished compared with the two aspects mentioned above. The central government of China just decreased the proportion of the developers’ capital in cash without canceling it. So, it should be clarified as the main index of real estate cost.

Niu Dao believed that the NBS can get the scientific and correct results only after making clear of these three aspects. Without the support from those data, the result of the survey may do nothing but misguide the ordinary people.

In addition, Niu Dao said: “It is certain that those officials having problems in real estate will try every means to hurdle this survey.”

Last year, former Vice Secretary-general of the National People’s Congress Cheng Siwei said that the house prices include the land price, cost of construction materials which take 50% of the total cost, the taxes and duties of the government whose proportion is 20% and the developers’ profits accounting for the rest 30%. He said that some of the developers’ profits are used for bribing the government officials.

Local Governments as the Arch-criminal?

This March, the National Association of Industry and Commerce (NAIC) issued a report about China’s house prices in the National People’s Congress, saying that the 49.42% of the real estate development cost is taken by the local governments in 9 cities, of which Shanghai government takes 64.5%, the largest in these 9 cities.

The NAIC’s report pointed out that the taxes and duties of the real estate are too high and they are still increasing. It is a main reason for the increasing house prices. Take Beijing for example, the real estate development enterprises have to contact with more than 20 government departments in the process of development and have to pay 20 kinds of different fees. In Guangzhou, the developers have to contact with 30 more government departments and pay 20 more kinds of fees.

Han Zheng, Mayor of Shanghai, said that he didn’t know where the NAIC got the data. He also said that the data was wrong but he didn’t give out the “correct” data.

According to the source, Shanghai government once planned to denounce the report of the NAIC with the statistics made by various organizations and departments. But disappointedly, such a denouncement has never happened.

“The report of the NAIC attributes the high house prices to the local governments. But who benefit from increasing house prices? Just look at the Forbes Rich List,” said a Shanghai government official.

The dispute between Shanghai government and the NAIC is just a discussion about who benefit the more from the high-price houses - the government or developers.

On March 11, a press release about the guarantee of housing was held after the 2nd Session of the 11th National People’s Congress. Qi Ji, Minister of the Housing and Urban-Rural Construction gave out an explanation to the composition of the house prices. Qi pointed out that the land cost is the main factor to influence the house prices.

“Now the local governments in different places of China live on selling land. It is a normal phenomenon,” said a professor from Beijing University. “Previously we thought that the governments took 30% of the cost but the NAIC increased the proportion. I don’t doubt this at all”

According to a report from the State Council, the land remise fund and the tax revenue concerning real estate take 40% of the local governments’ budgets. In some places, the net income of land remise fund even takes 60% of the governments’ extra budgetary income. This number is quite close to the one in NAIC’s report.

“The excessive dependence of the local governments on the land finance is the basic cause of the high-price houses,” said Liang Jiyang, a researcher from the Chinese Academy of Science. The local governments fall over themselves for the land finance, which pushes the house prices.

According to the statistics, Shanghai government has gained 100 billion yuan (USD 14.66 billion) through land leasing in these 3 years. Chongqing government gained 40 billion yuan (USD 5.86 billion) from the taxes and duties of the real estate in 2007, taking 50.8% of its total financial income. The government of Zhengzhou, Henan got 4.06-billion-yuan (USD 595.07 million) tax revenue from the real estate and construction decoration in the first three quarters of 2007, taking 48.6% of its total tax revenue.

In 2007, the total income of land remise fund in China accumulated to 1.2 trillion yuan (USD 175.88 billion). “Right now the real estate has kidnapped China’s economy. The more dependent of the local governments are on the real estate, the more damages they will suffer in the financial crisis,” said a person in his Blog.

“The current house prices are overdrawing the future ones,” said a professor from Beijing Normal University. The land remise fund has much more influence upon the real estate industry than the increase of interests.

On May 5, the economist Mao Yushi said in his Blog that it is stupid to blame the real estate developers for the high house prices instead of the governments. He said: “China’s real estate market has been twisted, which is mainly embodied at the exorbitant house prices. The main reason of the high prices is that the governments monopolize the land. So I say that the government is the one to be blamed for the high house prices.”

Recently, with the recovery of the real estate market, there are hot waves of expropriating land in the different places of China. Many new records of land price were subsequently seen in Shanghai, Wenzhou and Hangzhou.

“The local governments play an important role in expropriating land because they want to fill the financial holes,” said Yu Nanping, a professor of East China Normal University. With the implementation of the central government’s investment plans, the local governments need enough financial strength to push those projects. To remise land is an effective way to relieve the financial stress.

Game between Central and Local Governments

Yuan Jian, an independent commentator said that local governments are the biggest winner in the real estate market in China. The larger the real estate market is, the more profits the local governments can get. However, the local governments don’t have to pay anything for those profits. The cost for them is zero. This extreme dissymmetry between cost and profit makes the local governments of different places in China become the engine for the increasing house prices.

Yuan Jian said that the main roles in the Chinese real estate market are not those developers nor the customers, but the central government and the local governments.

For the local governments, the land is not only the financial right but also the monetary right. The land remised can be immediately changed into the loans from the banks. This means that the local governments get back the two important rights from the central government, as well as the initiatives of pushing the economic development of their own places.

Another benefit for the local governments from real estate is that it obviously drives the local economic growth. Someone estimated that the driving coefficient of the real estate industry even reaches 1 against 2.86. In Shanghai whose real estate industry is the hottest in the whole country, the GDP growth directly driven by real estate industry in 2004 was 17%, making the role of real estate become very important in Shanghai’s development. Since the middle 1990s, the local government’s officials’ political performances are mainly judged by the GDP growth of where they work. Therefore, the officials attach great importance to the GDP, not only for the economy, but also for their political career. Since the real estate can pull the economic growth, it can also pull the political performance of the government officials. Therefore, many local governments consider the real estate industry as the skeleton key to economic development. 

Besides, the local governments pay nothing for the huge profit from the real estate as mentioned above. Therefore, it seems quite rational and clever for those local governments to focus on the real estate.

Yuan Jian said that real estate is just like pennies from the heaven for the local governments and real estate developers. But such a good will never happen! Actually, the huge profits must be paid by someone. The central government, unfortunately, plays this role.

Compared with the local governments, the central government is in dilemma. On the one hand, it hopes that the development of real estate will drive the economic growth of the whole country to realize the goal of “defending eight”; on the other hand, the central government has to assume the financial risk of the real estate and the waste of national land resources. Besides, the high house prices will cause the dissatisfaction of the ordinary people which may damage the root of administration. However, the local governments and real estate developers don’t care about this problem. This makes the central government begin to share different opinions in the exorbitant house prices.

In conclusion, the real estate industry in China is very complicated. Too many parties have their own interests in this field. That’s why the real estate cost is hard to be figured out. We are longing to see whether the NBS’s survey can get expected achievements.