Wall Street Journal – Huang Qifan is the mayor of the southwestern China metropolis Chongqing and one of the country’s most well-known voices on property market issues. He is now spearheading one of the largest buildups of subsidized housing in China, which itself is undertaking one of the world’s largest-ever such projects. He discussed Chongqing’s goals for real-estate affordability, regulation and development, supporting his technocratic arguments with an array of figures and by making comparisons with the situation in the U.S. property market.
From the interview, it appears the technocrats in China have a reasonable handle on the property market situation.
NOTE – if the metrics and ratios that the Mayor of Chongqing cites are correct then they can also be used to manage and limit real estate bubbles in other countries (like the US and Europe).
Mayor Huang – We have already adopted four specific measures to regulate and address the property market in Chongqing. First of all we look at property as consumer goods, so we struck a balance between the supply and demand. Each year the government investment in the property market will be no larger than 20% of government investment in fixed assets. Thirdly, we have already initiated some pilot projects here in Chongqing in collecting property tax. Fourthly, we also came up with a rational leverage ratio in terms of mortgage loans. The first time buyers have to pay 30% down payment, the second home needs you to pay 60% down payment and purchasing the third home you have to pay fully.
I think my model here covering these four aspects is really working very well here in Chongqing and I think it will also work very well in China at large, and even I think we can provide this model to the United States for its reference.
I think with these four measures effectively implemented we will accomplish that objective to enable the home buyers to buy a home with six or seven years of family income. If there is any one of these four measures that fails to be properly implemented I think there will be two kinds of scenarios: first of all excessive bubbles on the market and secondly sluggishness of the market.
In the past 10 years in the United States we saw that around the year 2000 the financial companies came up with the sub-prime loan products and it only took six or seven years to create excessive bubbles on the market, which led to the crisis in 2008. That crisis cut the value of the market by 30%. I think this is something triggered by the policy of zero down payment.
MAYOR HUANG: With these four measures in place we have already found the proper pace of the property market and the rational relationship between supply and demand.
Talking about the overall size of the (residential) construction, I think we always deal with five ratios. The first one is the per capita gross floor area is maintained below 40 square meters. (In rural parts of) Chongqing Municipality this figure is maintained below 30 square meters. (In areas) consisting of a population above 10 million, the total construction area needed will be 400 million square meters…We keep a very well measured pace. We do not hope to see the construction of all those well needed houses within a concentrated period say two or five years.
When it comes to office buildings there is a ratio that we bear in mind. For every 10,000 yuan of GDP the office building area needed is 0.5 square meter. And if we have 1 trillion yuan GDP it means that the office area needed will be 50 million square meters. If the GDP expands to 2 trillion yuan GDP it means that the office area needed will also be expanded to 100 million square meters.
I’m asked why there are prices of 20,000 yuan per square meter on the market, I’d like to say the reason is very simple…50% of the GDP is generated through the service industry. If you take the economic structure at large, the average price of all the factors, taking into consideration the average price on the market will be 20,000 yuan per square meter.
And there is also a ratio governing the commercial sector, for example the department stores in the shopping malls. It depends on the retail sales. We have annual retail sales of 300 billion yuan, so we need 30 million square meters of commercial house.
And our fifth ratio is about the renovation of shanty towns. For example, in various areas we have knocked down a big area of shabby houses. There is a ratio. Each 10,000 square meters of those shabby houses knocked down will be compensated by newly constructed areas of 15,000 square meters.
You’ll find that all these measures are done according to the market philosophies and we are very good at mathematics here. We always take into consideration the people’s demand, the economic capacity in building these housing products. We do not hope to see those newly built houses just left empty.
Since you asked me my assessment of the Chinese property market…as a whole whether I am as pessimistic as some foreign analysts in the Chinese market. Actually I think some assessments from foreign analysts come to an extreme. Indeed there are three major problems in the Chinese property market and we will correct these three problems and solve these problems in the future. But I don’t think the situation is as pessimistic as some foreign analysts said.
In the Tier 1 (Chinese) cities indeed there are problems of excessively high prices. In those cities you’ll also find a very high empty ratio of the property markets because many home buyers just come to buy the products out of speculative purposes. There are too many speculative purchases. In those Tier 1 cities, you’ll find that sometimes after the tendering process concluded the land price was even higher than the house-price itself. And when it comes to the financial regulation, I don’t think the authorities have come up with an accurate and appropriate leverage ratio. Indeed there are quite a lot of bubbles on the market.
In some big and medium cities in coastal China, due to these several factors — the high price, the high empty rate and the high land and inappropriate leverage ratio — there are indeed bubbles emerging on the market and basically something that we must probably address in the future.
I think there are three fundamentals that cannot be overlooked otherwise we will come to a wrong conclusion about the market prospects in the next 10 years. We have to understand that in some Tier 2 or Tier 3 cities in inland China — for example Chongqing, Chengdu, Xian and Wuhan — I think the price is rather rational. There wasn’t too much bubble.
Currently the urbanization rate in China is 40%. In the next 10 to 20 years, the urbanization rate will continue to grow to 50% or even 60%. It means that farmers will be moving to the cities and becoming city residents. And during this process there is a very rapid increase in the demand of the property products. And this is rigid demand. For example each person needs on average 30 square meters of living area. If there an incoming of 100 million farmers into cities it means hundreds of millions of newly built housing areas are needed.
In the United States and Europe the situation is broadly different. The urbanization rate has been approaching 80%. The property market has been saturated. This is not the story in China. If you compare China with the United States and Europe you will find a lot of differences.
Secondly, presently China’s GDP per capita stands at $4,000. And in the next 10 years the per capita GDP will be increasing to $10,000 and in the next 20 years $20,000. It represents a huge demand for better homes, high-end apartments because during this process people would like to improve their housing conditions. So it means its huge and sustained demand in the next 10 years, or even to 20 years. When the per capita GDP comes to a stage ranging between $30,000 and $50,000 houses are no longer the priority for residents. But when we are moving up from the per capita GDP of $4,000 to $20,000, houses are the most preferred consumer goods by the residents. Thirdly I think the Chinese government is very good at macro control and regulation. It is also very good at sizing up the situation and correcting the deviation to the right path. Perhaps in the past the government was inexperienced because such restrictive measures were adopted on the real-estate market and restraining the access to the get the loans. But now we come to such an understanding that it will be fine only if we come up with an appropriate leverage ratio of the mortgage loan. And in the past, the tax was collected during the transaction process, now we are paying greater attention to collect tax from owning the products. The same is also true to regulating the land price. All in all we are summarizing the previous experience and trying to do a better job…