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Beijing’s Housing Market Bubble Continues to Expand

Despite measures to cool the real estate market, the price of housing in Beijing continues to run up and is beyond the reach of most ordinary residents.

With surging housing prices, Beijing is becoming the "King of China’s Housing Market" amid China’s macroeconomic control instituted a year ago. While the fear of land shortage has triggered panic home buying, investors are flooding to Beijing, and the central administration is considering a new policy.

On April 23, the number of people waiting in line in the bank lobby—the Beijing Huaxiang Branch of the Agricultural Bank of China—remained at about 50.

There was no money left in the ATM machine outside the bank. "The money has been withdrawn to buy houses," said the bank security guard.

The busy bank is an indication of the heated purchases going on in the apartment building next door. Owners of the Ten-Thousand-Year Flower City, an apartment building next to the bank, had started to sell VIP cards for 10,000 yuan (about US$1,2551). The cards gave buyers priority in selecting their apartment units, and they could apply the cost of the card toward the purchase price. More than 200 cards were sold on the first day.

Located on the southwest side of the Third Ring of Beijing City, this apartment complex has gone through whirlwind increases within the past three months. The selling price in January was 5,700 yuan (US$713) per square meter. (All prices are per square meter, which is about 1.2 square yards or 10 square feet.) The price rose to 6,600 yuan (US$825) in March. When its fourth phase was ready for sale in May, the price was expected to increase to 7,000 yuan (US$962), a 35 percent increase from January.

Housing prices in the capital city have increased steadily since spring of this year. On April 12, the Beijing Urban Construction Research Center announced that the expected average price of residential housing in the city was 6,885 yuan (US$860) per square meter, a 14.8 percent growth over the same period last year. Some media reported that the housing prices in Beijing had exceeded that of Shanghai, making Beijing the "King of China’s Housing Market."

It was a strange phenomenon: The supply, sales, and prices of Beijing’s housing market increased, but there was still a housing shortage.

About the same time last year, the central government maintained an iron grip on the real estate market. The State Council’s Old Eight Regulations and New Eight Regulations were issued in succession and caused housing prices to stagnate.

Why were housing prices increasing rampantly one year after macro-control? What drives the phenomenon? Some real estate agents are starting to worry that this round of price hikes is a dangerous signal.{mospagebreak}

The "Crazy Rise" in Housing Prices

"That is crazy!" Liu Bo just cannot imagine how the price of Coastal Sailuo City could go up several hundred yuan per square meter in a month. "Beijing housing prices are rising like crazy, and people are buying like crazy," Liu said.

"If you do not decide now, you will have to wait for the next phase," Tang Xiaoyuan, the sales lady of Coastal Sailuo City, advised Liu. The longer he waits, the more expensive houses will be.

The sales pitch made Liu nervous. In early March, when Coastal Sailuo City offered to sell at 7,400 yuan (US$925) per square meter, he just smiled and shrugged it off: "Let me wait for a while." In less than a month, the price rose to 7,800 yuan (US$975).

A week later, Liu Bo, still undecided, was informed that some of the models had sold for as high as 8,200 yuan (US$1,025).

"In one evening, Beijing can be covered with a layer of yellow sand, and I have to pay an additional 100,000 yuan (US$12,500) in total purchase in one month," he said.

Liu, who works as an editor in a publishing company, has a monthly income of 7,000 yuan (US$875). After the Chinese New Year, he started to think about buying a house. However after two months of searching, everything he could see had been hit with price increases.

On April 10, when he rushed to register for the pre-selling of the second phase of another residential housing development, Sihao Yijing, the price had already climbed from 8,300 to 8,500 yuan (US$1,038-$1,063) in only four days.

"I just want to have a home of my own," Liu said, but he felt that his home was fading farther and farther away from him. "If there has to be a deadline for me to get a house, it’s better to be before the end of my lifetime."

Zhou Xiaodong, a white-collar employee, planned to buy his new house somewhere around the Fourth Ring of Beijing, where the transportation is convenient and the price was 7,000 yuan (US$875) per square meter with a total price of 600,000 yuan (US$75,000). On April 9, after he attended the 2006 Beijing Spring International Housing Exhibit, he found that residential property in the 7,000 yuan (US$875) price range in the Fourth Ring area was almost gone.{mospagebreak}

One phenomenon evident from the housing exhibit is that the increase in prices is not affecting housing sales. Sales price, supply, and sales volume went up hand in hand.

Over 90 apartment units were displayed at the exhibit, which drew 200,000 people. There were 2,000 purchase offers made: a total of 231,320 square meters (2.49 million square feet), 1.44 billion yuan (US$1.4 million) in sales revenue, and a 300 million (US$37.5 million) increase (40 percent) over the winter exhibits last year.

The statistics of Beijing Real Estate Information Network show that the presold units for the first quarter this year amounted to 3.7 million square meters, while it was 3.2 million square meters for the same period last year, an increase of 15.2 percent from one year to the next. The number of online purchases also grew rapidly, with a daily number of signed contracts reaching over 500 and with a record high of 803 on April 15.

The housing prices in Beijing have even surpassed those in Shanghai, which was believed to have the highest housing prices in China. Data released by the Statistics Bureaus from these two cities showed that Beijing’s housing prices are 27 yuan (US$3.4) per square meter higher than Shanghai’s prices.

On April 13, Nanfang Weekend claimed that Beijing has become the "King of China’s housing market." However, some official statistics do not agree with the price hikes.

On April 12, Beijing Urban Construction Research Center announced that the average Beijing residential pre-sell housing price for the first quarter was 6,885 yuan (US$861) per square meter, 14.8 percent higher than the preceding year. (The price growth for the first quarter in 2005 was 19.2 percent.) The conclusion was that the "pre-sell housing price is stable on a quarter-to-quarter basis, with an evident fall of growth rate on a year-to-year basis."

On April 20, statistics published by the Beijing City Statistics Bureau listed the growth rate of housing prices at 7.6 percent.

However, those statistics are based on the average price of houses in all of Beijing, including those in Miyun and Huairou, which average 3,000 yuan (US$375) per square meter or lower. The price increase in the Fourth Ring area far exceeds these figures.

"Even if the growth rate is lower, the base is already too large," Liu Bo said, and he still cannot afford a house.{mospagebreak}

Driven by Panic Consumption?

"We can unite and not buy houses so that we can drag the prices down," Liu Tao, a buyer, cried out loud in the exhibit.

He drew attention, but prospective buyers immediately turned back to the developers for flyers. It was 4 p.m. on April 9. More than half of the developers at the Spring Housing Exhibit had left, but there were still groups of people crowded at the gate of the exhibit.

"The higher the price increases, the more people buy; the more people buy, the higher the prices will be," Liu said. Buyers fighting for purchases drive the price increases.

Li Wenjie, the general manager of Northern China Region of Zhongyuan Real Estate, thinks that since the beginning of 2006, buyers have been in a wait-and-see mentality. But when they found that prices kept increasing, they started to make purchasing decisions out of fear that prices would continue to go up.

In May 2005, seven ministries and commissions, including the Ministry of Construction, issued a notice entitled "Doing a Better Job Stabilizing Housing Prices" that stated that starting from June 1, 2005, individual buyers would need to pay sales tax for transactions made less than two years after the initial purchase.

Compared with the rapid price decline in Shanghai, the prices in Beijing did not drop even though the real estate market slowed down for a while.

"Macro-control needs to be adjusted," said Wang Yulin, the vice director of the Policy Research Center of the Ministry of Construction. "Last year, the target of macro-control was the real estate investors, but there are not that many in Beijing yet."

Another huge group of buyers were also propping up the prices in Beijing.

On April 9, in Xinghe Bay, outside the East Fourth Ring, several Beijing government officials were showing the houses to officials from other provinces. The price tag of 16,000 yuan (US$2,000) per square meter did not scare the buyers away. In March alone, nearly 80 suites were sold, with sales revenue of 50 million yuan (US$6.3 million).

There are too many rich people and officials wanting to buy houses in Beijing," a sales representative and former employee of the high-scale Zhuyucheng Apartment Complex and Phoenix Real Estate told us privately. Most of the officials come from nearby provinces and cities, and the majority of the business buyers are owners of coal mines in Shanxi Province.{mospagebreak}

"In addition, we have clients such as college graduates, companies relocating or stationing in Beijing from foreign countries or other provinces," said Huang Xiqing, the vice general manager of Thousand-Year Flower City.

Many buyers are under the impression that if they don’t buy, other people will buy.

But insiders analyzed that the buyers’ groups have formed a structure like a pyramid, with people on the bottom of the food chain who are not well off but who have the highest demand for houses.

Many people who were interviewed used "panic" to describe their feeling: "If I don’t buy now, the price will keep rising."

Huang Xiqing, the vice general manager of Ten-Thousand-Year Flower City believes that the three objectives of macro-control are "to tighten the money and land supply, and control price increases." The goal was to lower the risks, adjust the structure, and control the speed of urban development thus inhibiting rapidly rising housing prices. But in reality, tightening the money and land supply turned out to be the factor that is driving housing prices.

Wang Zhigang, the famous strategic real estate advisor and consultant, said in an interview with China Business Newspaper, "the burning fever of Beijing’s housing market is actually driven by panic consumption and investment purchases."

Not a Fair Game

Facing ever-increasing housing prices, can ordinary buyers play games with the developers?

"It is not realistic," Huang Xiqing said. "Unlike the developers, it’s difficult for the buyers to unite."

In the year of macro-control, people were holding money to wait and see—and so were the developers.

"In less than a year, the buyers ended up paying for the increase in several hundred yuan per square meter," one real estate agent explained. If the buyers were playing games with the developers, apparently the buyers lost in the end.

Sales control is a common practice used by every developer and agent in this game.{mospagebreak}

On April 9, 2006, in the Sihao Yijing real estate model home, one sales representative shared the selling strategy: First ask prospective buyers to register. Get to know their situations to determine the selling price. If 500 units are ready for sale, we only put out 100, which are usually not that good. When those 100 are sold out, we immediately raise the price.

From the beginning of the buyer registration to the date of sale, the price at Sihao Yijing had already risen from 8,300 to 8,500 yuan (US$1,038-$1,063) per square meter. Sellers claimed that "the numbers of registered buyers … exceeded total available units."

"Buyers will not be able to play the game with the developers because playing games requires resources," said Duan Meiyuan, the general manager of the Beijing Chaoyang Great Real Estate Agency. "Because developers had a lot of land in hand with financial resources far stronger than [that of] buyers, the buyers weren’t able to fight against the developers."

Earlier this year, in Guangzhou, where the housing prices also went up rapidly, people started to criticize developers’ collusion to drive up prices, calling it "robbery."

This opinion was shared by Zhang Yaoqing, professor and director of the Real Estate Research Center of Capital Economic and Trade University.

Zhang believed that the bargaining power is in the hands of the developers because the real estate market is a semi-monopolized market, and the developers usually collude on pricing.

"They may not openly drive up the prices, but they collude to support the prices," Zhang said. No matter the quality of the houses, new house prices usually follow the highest price in the neighboring area and will be adjusted up periodically.

One real estate developer told our reporter, "In Beijing, no matter how poorly the houses were built and what kind of real estate services were provided, you can always sell for a high price, and they will be gone immediately."

Invisible Hands Promote Fear of a Land Shortage

"If you don’t buy now, you will not be able to buy them no matter how much you spend," said a sales lady for CBD Legend, near the East Three Ring area. She was speaking to a reporter at the State Housing Exhibit. She said that the government will soon stop issuing land permits in the city, so there will be no new construction.{mospagebreak}

CBD Legend is becoming legendary for its price hikes: In December 2005, the opening price was 8,000 yuan (US$1,000) per square meter; it is now 8,800 yuan (US$1,100).

Beijing housing prices continued to go up, and the notion of a shortage of land for new construction expedited the process.

In July 2005, the Beijing Bureau of Land and Resources published the quota for land use for the year, which stated that no new construction for residential housing would be added within the Second Ring area.

Land price increases also jacked up the housing prices.

On April 17, one piece of land in the Fengtai District was sold for as high as 34 million yuan (US$4.25 million) after 64 rounds of auction.

It was calculated that the final price for the land was 3,376 yuan (US$422) per square meter. Tang Wenjian, the winner and the general manager of Beijing Zhengjiang Real Estate said, "We have to put the sale price higher than 8,000 yuan (US$1,000) per square meter to make a profit."

This price is a lot higher than most houses in the area. In September of last year, the opening price offered by Zhonghai City, a 1.7 million square meter development area, was 5,400 yuan (US$675) per square meter, and the current selling price is only about 6,500 yuan (US$813).

An insider estimates that if one uses the recognized ratio of 40 percent of the price for the land, theoretically speaking, if the land becomes sellable for housing, in one year the price can be as high as 12,000 yuan (US$1,500) per square meter.

To Li Wenjie, the growth rate of the selling price for land had far exceeded the normal growth rate of housing prices.

Wang Shu, the general sales manager of Zhongda Hengji Real Estate, said that after the "New Policies for Selling Land" was issued on August 31, 2004, land selling was better regulated while the land price continued to increase with a wide margin. The problem was that while the government benefited from the increase of land sales, the profit margin for real estate developers did not shrink. As a result, the buyers ended up bearing the burden.

"If we don’t regulate the developers, it is useless no matter how much land we sell sell," says Wang Yuling, vice director of the Policy Research Center of the Ministry of Construction. He believes that the government did not do a good job of regulation. It should use administrative means to enlarge the differences in price levels for housing in different categories.

Translated by CHINASCOPE (excerpt) from New Beijing (Xin Jing Bao)