Too Late: Wenzhou Sets Off The Housing Bomb

In March, a Mr. Wang paid 658,000 yuan for a new home in Wenzhou, only to learn the land rights expired earlier that month. The cost to extend those land rights is 300,000 yuan, or 45.6% of the purchase price because the city of Wenzhou assessed the rights extension using the land's market value.

Yesterday in The Time Bomb In China's Housing Market, I wrote:
In Wenzhou, the government sold land in the 1990s with 20 year usage rights attached. Those rights are starting to expire. The article below is an interview with Wenzhou City Land Resources Bureau, Land Use Management Department Director Zhang Shaoqing about the implications for home owners.

The shocking revelation is homeowners are likely to pay full price for rights extensions. In which case, the land value component of a home's value is a depreciating asset. The land value falls as rights tick down to expiration, at which time they must be repurchased. Homeowners may need to pay as much as 30-50% of a home's transacted price.

As the city officials puts it, if you pay full price for a home that has expiring land rights, it's like paying full price for a 10-year old car. For uniformed buyers, this would be like walking into a luxury car dealership and paying top dollar for the latest models, only to be handed the keys to a used clunker.
For most of the country, this is not an immediate issue because land rights still have decades to go, but the case in Wenzhou has detonated this time bomb, bringing the issue to the forefront at the worst possible moment.

Two major articles are out today. The first asks if Chinese homeowners are simply long-term renters and presents 4 more cases of land rights expiration in Qingdao and Shenzhen: 所有房东都只是国家租户?五个案例看土地期满如何续期
Huangdao District Qingdao case in Ali district.

Alishan residential land use rights had 5071 homeowners with rights of 20, 30 and 35 years, of which 310 household's rights were due to expire at the end of June 2009. Media houses to those named "expiration houses." It was reported that the Qingdao government renewal program are: 1) property law rules unclear, the land should be paid for renewal expires, need to continue to pay transfer fees. 2) Using the regional average land price in the past year to calculate on the basis, then calculated construction area is about 60% of the land area. The land in Huangdao district was 1000 yuan per square meter at the time, homeowners with 100 square meters homes needed to pay 60,000 yuan.
There were three cases in Shenzhen:
A Nanshan Jintaoyuan district. In 2011, Taoyuan building owners were told that after the expiration of the land, the Shenzhen government will be free to recover land use rights. Subsequently, Jintaoyuan reported by the media to become: "the country's first land-use rights will expire by the government to recover unpaid property" caused great public controversy. Later, the Shenzhen government to clarify: after the expiration of the period of land use rights in the residential part of the building in Taoyuan based on "Property Law" stipulates after the expiration there is automatic renewal, land use rights of the non-residential part, in accordance with the implementation of the law will be handled when the time comes.

The second case is an international commercial building at Lo Wu. International Business Building, the same building there are rights of 20, 30, 40, 50 years, four different real estate licenses, the first in 2001 has expired. Shenzhen City, introduced in 2004, "Shenzhen expiration of certain provisions of the Real Estate Renewal": land expires, in accordance with the benchmark 35 percent premium to renew land rights. International Commercial Building to the success of the extension.

A recent case is the Futian District, Great Wall Building. In March Sina reported in Futian the owner of a building from the 1980s submitted to the Government a request for an extension of land rights, successfully extended housing and land rights from 50 years to extend to 70 years. The housing area is 80.58 square meters, to pay the amount of 44,940 yuan, the average price of 557 yuan per square meter. Later, the owner sold it for 7.1 million yuan. Based on the 7.1 million yuan price, the cost of the renewal of Shenzhen residential housing rights is 0.6 percent.
The takeaway:
In the five cases, Qingdao, Shenzhen and Wenzhou government at least agree that the renewal must be paid for.
The relevant law is not the property law, however, but the Urban Renewal law:
In addition, Phoenix FINANCE also found that the legal basis for local government renewal fee is "Urban Real Estate Management Law", rather than property law. Phoenix FINANCE Search for "Urban Real Estate Management Law" Article 21 states: "The land use right transfer contract life expires and the land users to continue to use the land shall be no later than one year to apply for renewal before the expiry of the approval of ...... grant renewal, should be re-sign land use right transfer contract, pay the land use right transfer fee in accordance with regulations. expiry of the land use right transfer contract life, the land user has not applied for renewal or the application for extension pursuant to the preceding provision of unapproved land use rights by the State to recover unpaid. "" urban Real estate administration law "stipulates that was paid.

The difference is only, Shenzhen and Qingdao renewal fees are based on the local "announced benchmark premium", generally a few hundred or thousand yuan, while Wenzhou is performing a "market assessment of land value" , that is, the same type of public land transfer the price is about the price, Wenzhou charged far more than Shenzhen and Qingdao, therefore this event is considered to have some bellwether significance, if emulated around the country, the sky is falling!
Therefore, this message was interpreted by the media as heavily bearish for the property market, landlords are all just long-term tenants, this is not difficult to understand.
The article concludes with a discussion of Hong Kong as an example to emulate:
As everyone knows, the mainland city land system is learning Hong Kong, there are also problems of land renewal expires. But Phoenix found FINANCE land in Hong Kong is the principle of renewal expires : free renewal, only to pay annual rent. Hong Kong's "Basic Law" stipulates that the new deadline for the transfer of land is generally 50 years after the expiration of land use rights, there is no right of renewal of land by the government, agreed to be extended for another 50 years, not subject to a one-time premium, shall be paid each year only rateable value to 3% of the annual rent.

Another article with a similar headline says Chinese citizens are raging online. It also gives some commentary from Liu Xiaobo: 楼市重磅利空:所有房东都只是长期租户?
Well-known financial commentator Liu Xiaobo said this:

1, land ownership, the right to use the setting for the country, in the final analysis is nothing more than a tax issue. If the state assigns property rights to an individual, you can activate the private wealth of enthusiasm, but the state can continue to tax through the tax system. If you figured out the problem, we might start urban construction land, the ownership of land will be a free gift to individuals, businesses. Thus, the so-called land use rights expire problem would not exist. All countries fixed asset tax rates based on the actual government expenditure adjustments.

2, if temporarily unable to achieve the above vision, the way legislation should be adopted at the national level, to be clear on the details of the renewal of land use rights issues as soon as possible. Otherwise, at the critical moment of the property market to the inventory, "Wenzhou incident" a serious blow to the enthusiasm of all investment buyers. In the non-hot city, the Government is to encourage investment buyers.

3, should respect the provisions of the 2007 edition of "Property Law", to recognize the "automatic renewal." That is to say, if the owners do not expire when the initiative to apply for renewal, the national default this house for their own use, not demolitions, not strong collection of land use fees. If the owners want to sell, mortgage or inherit it when it needs to pay the premium.

4, for the initiative to renew housing, land use fee payment method diversify as much as possible, it can be paid annually, and it can be a one-time payment. For a one-time payment, give a greater discount. Try wealth with the people, instead of seizing an opportunity.

5, If the policy is not clear, "the older house" transactions will be more light, or even stop entirely. On the surface, this seems to be good news for developers, but it will crush the enthusiasm of investment buyers, in addition a lot of assets in the whole of society will fall back to Earth.

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