Speculators Take Over Chinese Housing Market

China's housing market may have already entered a blow-off phase with the government and speculators locked in a self-reinforcing cycle where new housing regulation triggers increased speculative behavior and the government in turn ratchets up controls to crush speculative demand, only to spur it even more.

Data on the Chinese housing market went from bad to worse with CHFS showing investment responsible for 50 percent of new demand. Now there's anecdotal evidence to match it as data shows companies are responsible for a rising share of real estate investment.

The story starts with seemingly bad enough news: listed companies in China (A-shares) are heavily involved in real estate speculation. Data from June shows 46 percent of listed companies hold nearly 1 trillion yuan in real estate assets, up nearly 20 percent in the past year. Companies buy properties and sit on them, treating them like a bank account that can be tapped during hard times to boost their profitability. However, their activity only represents the tip of the speculative iceberg.

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The trend of various companies pushing to buy a house is obvious

The Audit Commission recently released a 2017 work report showing that a number of financial institutions and companies are involved in the idleness of real estate assets. According to wind data, as of June 26, among the 3,852 A-share listed companies, a total of 1,656 listed companies held investment properties, accounting for 46.23%, holding a total market value of 990.46 billion yuan, a year-on-year increase of nearly 20%.

The idleness of real estate waiting for appreciation has become a practice for some listed companies to increase profits in recent years. From 2016 to 2017, a number of companies chose to sell their properties to increase their performance. Lu Peng, secretary-general of Jiangsu Riying Electronics Co., Ltd., said that the phenomenon of listed companies buying and holding investment real estate is indeed more common.

Listed companies often open new subsidiaries in unrelated industries, but opening a real estate division would attract government scrutiny these days. Private companies have a far easier time entering real estate. Moreover, as the economy slows and profitability shrinks, businesses will turn to real estate speculation for growth and profit.

Real estate speculation in listed companies is only the tip of the iceberg of the company's real estate speculation. The scale of real estate speculation in non-listed companies is much larger than that of listed companies . “Real estate appreciation is fast, and corporate mergers and acquisitions or other financial investment channels are relatively narrow. Investment in real estate is a good channel for asset appreciation, especially when the company’s main business is in a bottleneck or the profit decline is obvious.” Lu Peng said.

Companies are increasingly playing a role in real estate, hitting 55 percent of participants in a Shanghai housing lottery.

Recently, as some cities' real estate market has become increasingly hot, the trend of various companies to buy houses has become more obvious. Taking Shanghai as an example, the well-respected old mansion Cuihu Tiandi opened 118 suites on April 10th. According to the information released by Shanghai Notary Network, a total of 385 customers participated in the above-mentioned real estate lottery, and the list of company customers reached 214 groups, accounting for 55.6%, more than half of the total number of subscriptions.

According to Shenzhen Zhongyuan Real Estate Data, the Shenzhen real estate market has traded about 122 transactions in 2015, amounting to 30.6 billion yuan, and rapidly increased to 183 transactions in 2017, amounting to about 51.4 billion yuan, while Vanke Shennan Road and COFCO Tianyue Apartment products such as nicknames have been packaged and sold in whole or in part to the company.

Housing lotteries have ignited a new fever in the housing market, bringing back fake divorces and all the rest. See: Housing Lottery Frenzy in Shenzhen. Individuals are able to get around housing market regulations in some cities using a shell company. One man in Hangzhou was able to win 5 homes in a lottery by registering several companies and entering all of them in the lottery. See: Hangzhou Housing Lottery Results: One Man Wins 5 Homes

We can also see the impact in the housing investment data collected by CHFS and discussed in Fever: Chinese Housing Investment Soars Past 50pc of Total Demand

The company's real estate speculation has increased the imbalance between supply and demand, and has become an important driver of housing prices.

Some industry insiders believe that the company's real estate speculation has aggravated the tight supply and demand relationship in the property market. Some large companies involved in real estate speculation have become an important promoter of rising house prices.

Some believe the "upside down" housing market is being caused by companies speculating in the market.

At present, there are “scissors difference” in the price of second-hand houses in new houses in many cities. This is also a reason why companies are keen on short-term real estate profits.

The company's real estate speculation not only squeezed the space for the purchase of the newly-purchased family, but also became a big push for the soaring housing prices. "There are some enterprises, especially small and medium-sized enterprises or private enterprises. Because the boss does not have the qualification to buy a house, he uses the enterprise to buy a house or real estate. As the housing prices continue to rise, the real estate market continues to be hot, and the company's real estate speculation will cause short-term market demand. Within the big rise, it is necessary to fill in the policy loopholes in a timely manner," said Gu Yunchang, deputy director of the Housing Policy Expert Committee of the Ministry of Housing and Urban-Rural Development.

Looking at the data from CHFS and factoring in the potential size of speculation through shell companies, it appears Chinese regulators may be chasing the speculative tail in the market.

Zhang Dawei, chief analyst of Zhongyuan Real Estate, believes that the purchase of commercial housing in the name of enterprises is a common phenomenon. This is a common way to avoid purchase restrictions. In the cities where the number is restricted, the proportion of enterprises buying houses continues to increase.

When housing speculation is outlawed, only outlaws will speculate in housing. Government restrictions have squeezed all but the most nimble and creative speculators out of the housing market, including the very group of people the government is trying to protect (home buyers). That, or the non-speculative buyers have retreated for economic reasons and the government's escalating war on speculation is a futile battle in the waning days of the war. The housing market has already turned, the music has already stopped, but the government and real estate speculators haven't realized it yet.

In China's Housing Mess: Govts Stimulating Demand and Curbing Supply, Fever Rising, I looked at how the government's latest efforts, such as housing lotteries and distorted supply (through mandatory affordable housing requirements on new developments) were causing an increase in speculative behavior. Housing lotteries are literally speculative endeavors. Everyone has an incentive to enter into a housing lottery. Someone watching the market would see an increase in housing demand. Tight regulations and supply distortion funnels market demand into smaller slices of the market, causing larger price increases. Speculators also view regulations as a bullish signal. They increase investment when real estate restrictions are added because every tightening cycle has been followed by an easing cycle. The best time to buy is when restrictions are at their peak because the easing cycle is close at hand. As the government intensifies its war on speculators, it increases speculative activity.

He Qianru, director of the Midland Realty Research Center, believes that some people have broken through the restrictions on purchases through the purchase of the company, and used the policy loopholes to earn the difference in a short period of time, which has brought adverse effects to the society.

“Although listed companies have proper investment real estate, it is understandable that if a large number of non-real estate development companies hold investment real estate, they need attention.” Dai Yiyi, a professor at Xiamen University School of Management, believes that, first of all, the use of listed companies is from the public. The funds raised participate in commercial real estate or residential market competition, and have an advantage in capital and identity, which is unfair to individual buyers. Secondly, the wealth effect of real estate appreciation and rapid realisation has attracted more listed companies to enter the market. The concept of “dry industry is not as good as real estate speculation” has boosted social speculation and is not conducive to the development of the real economy; once again, real estate speculation and mortuary of listed companies are a waste of capital. The purpose of developing the capital market is to allocate financial resources efficiently. The real estate speculators and mortuaries of listed companies waste a limited amount of financial resources, just as good steel does not use the blade.

Of course, another government crackdown is coming.

Strictly control the "real estate speculation" of enterprises, the industry calls for "fine containment" of speculation

Blocking the company's real estate speculation and other property market regulation loopholes is imminent. On June 26, the Hangzhou Housing Security and Housing Authority announced that Hangzhou has suspended the sale of housing (including commercial housing and second-hand housing) to enterprises, institutions and other institutions within the scope of housing purchase restrictions. This is the third hot spot in the near future. The city has explicitly suspended the purchase of houses by enterprises and institutions. On June 24, the Xi'an Housing Security and Housing Administration issued a notice to suspend the purchase of commercial housing in the restricted purchase area. On June 25, the Changsha Municipal Government Office issued a notice on further strengthening the regulation of the real estate market. Similarly, the sale of commercial housing and second-hand housing to enterprises was suspended.

The industry believes that Xi'an, Changsha, and Hangzhou have carried out regulation and control over time, and they have banned enterprises from buying houses. In fact, they are still controlling at the demand side. The control ideas are the same as the previous restrictions, and the demand for speculation is suppressed. In the future, the regulatory authorities should introduce more stringent measures to restrict the real estate franchise of enterprises and listed companies, especially those listed companies that have a large proportion of investment real estate.

He Qianru said that if you want to block the company's real estate speculation, you can first limit the number of houses purchased in the name of the company, followed by the number of years to limit the sale of the property, and then increase the transaction tax on the purchase of the company. In addition, it is necessary to check whether there are executives. By this way, the practice of buying a house by bypassing the purchase restriction policy.

Some insiders suggested that for the behavior of real estate speculators in listed companies, one should start from the perspective of supervision and require listed companies to proactively issue a letter of commitment not to participate in the purchase and holding of investment real estate in the IPO and refinancing links, and this behavior Incorporate into the scope of daily supervision. Once the promise is violated, the supervision department will issue warnings, interviews, fines, etc.; second, in the indirect financing stage of the bank, strengthen the supervision of the flow of commercial bank loans, and purchase the investment real estate with commercial bank loans. The responsible person implements the main responsibility and will be held accountable once it is identified.

“It is precisely because of the need to join the group between the crowd and the housing, which has led to distortions in the implementation of the country’s real estate control policy.” Wang Azhong, director of the Fuzhou University Real Estate Research Center, suggested that the overheated city’s real estate market regulation In order to develop in depth, the regulation of some places needs to be more refined and adjusted, and the limited housing must be accurately connected to the just-needed people. "The current situation of tight supply and demand in the real estate industry is not simply a shortage of supply. It is recommended to establish a housing tracking system, standardize the housing purchase process, and provide convenience for the just-needed people from a series of links such as lottery, credit, and taxation."

The government has already described the housing market as chaotic and warned a crackdown was coming. Now the Politburo has turned its eye towards real estate and in many cities, Chinese Officials Fear Stimulus Will Ignite the Housing Market. They're right to be worried because speculators sre the most adept at diverting credit into unapproved real estate investments.