1. Introduction
High price of houses and “Snail House” and etc. have become a heat and unavoidable topic currently. Expensive houses still continuously emerge. Although Circular of the General Office of the State Council on Effectively Stabilizing Housing Prices has been already printed and issued in 2011 and other measures have been taken, how much the housing price will drop is still unknown. As a result, the developers and the investors are worried and the confidences of the consumers become fragile. Many people attribute such crazy housing price to the flooded flow of the funds. Although it does indeed have an impact on the housing price, the key is the features of the land, the land-use systems in China and human factors.
2. The Features of the Land
From the overseas experiences, such as, Japan’s bubble crisis, Nordic banking crisis, East Asian financial crisis and the U.S subprime mortgage crisis, all these crises were related to the sharply fluctuation of the real estate prices. However, the occurrence of any financial risk and crisis does not a pure financial phenomenon but an inevitable consequence of a variety of problems and contradictions existing in the real economy. The real estate becomes a foam carrier mainly because of the special physical and economic characteristics and the market environments of the land assets. As a kind of commodity, compared with other kinds of commodities, it has many particularities. From the perspective of physical characteristics, the land is fixed. In other words, each block of land is unique and distinctive. From the perspective of economic characteristics, the land is characterized by scarcity. It is a kind of limited and non-renewable natural resource. Therefore, compared with the other factors of production, the supply of land is inelastic.
3. The Land-use Systems in China
China's land-use system reform lags behind and is imperfect. From rural collective land changed into urban construction land, from the Government's reserved land bought by enterprises, almost every link is found to reflect the principle of exchange of equal market values and violation of the spirit of equality of constitutional property rights.
Firstly, the transfer of rural collective land is limited to agricultural land. The rural construction land is not allowed to be converted into urban construction land and subject to the land expropriation mechanism of the higher levels of the government. And only a little poor compensations can be got by farmers. On the other hand, the government resells the use rights of such lands to the land developers and gets huge compensations for land transfer.
Secondly, many small property houses can appear in the forms of a “Greenhouse Villa”, “Artist Village” and “Ecological Demonstration” but the lands and small property houses in the “villages in the cities” can not.
Thirdly, the transfer prices of urban construction lands are different due to different uses (industrial land, residential land, commercial land, land for public facilities and storage space and etc.).
4. Human Factors
The “double track” Land-use system results in interventions of human factors and provides a convenient condition for the "rent-seeking" and "rent-creating". This is why research space can be freely changed into commercial land for housing and why the mariculture projects in the name of helping the poor can be converted into “Sea Palace”. The “multiple” prices and wealth resulted from "double track" system tempts governments at all levels and enterprises to step into the land markets in the hope of earning huge amount of money. The governments are encouraged by a saying “not for the people, better go home to sell sweet potatoes” and involved in the real estate markets as “referees” & “players” to get the land-use rights at a low price and resell such rights at high price to developers to earn a huge amount of money from land premium (Chan, 1999). In the first three quarters of 2010, according to the latest report released by the China Index Research Institute, Shanghai’s land transfer revenue hit 114 billion yuan (http://english.Peopledaily.com.cn/90001/90778/90862/7163561.html, visited on May 2, 2013).
In addition, the absence of regulation of the use and distribution of land-use rights revenues has led to state-owned land owned by all of the people only in the form and little are truly spent on the people's livelihood and public services. In the foreign countries, the most dazzling buildings are commercial buildings and office buildings while in China, in the transformation of the old cities, government office buildings rose one after another. Government office cars, feasts, funds for going abroad are so costly that surprise the masses. On one hand, the governments appropriate a large number of lands at low cost or transfer by agreements in many names. On the other hand, the governments only adopt the ways of “bidding, auctions or listed for trading” to transfer or sell the living land closely related to the life of the masses. In addition, there is only one “seller” in the land-use rights market. That is the local government. So, it is very common in this monopoly situation that the land-use right is transferred or sold at sky-high price.
In China, land-use right is not only an important source of government finances, but also a financial leverage weapon of enterprises. Many people consider that making the housing costs (land prices, construction costs, taxes, etc.) publicly exposed will help them to find out the source of “profiteering” of the real estate companies. In fact, the difference between the price and cost is not the only source or main source of “profiteering”. The real “profiteering” comes from the use of financial leverage of the enterprises.
In 2010, the “land bidding, auction and listed for trading” was popular with many state-owned enterprises and listed companies. They spent much money and raised the land prices not for really engaging in real estate development. On Oct. 8, the Youngor Group, Hua Ye Real Estate and Zhang Jiang Hi-tech Park published reports on land purchases, and the money spent was more than 5.7 billion yuan in total (http://english.Peopledaily.com.cn/90001/90778/90862/7163561.html, visited on May 2, 2013). The reason is that the land is a financial leverage. On one hand, the high price of the land can help to enhance the value of assets of the listed companies, thereby pushing up the company's stock price and more financial supports from the capital markets being gained. On the other hand, the land-use right is the best collateral (Yang and Wu, 1996). The land valued at hundreds of billions of RMB can help such enterprises to get a huge amount of credit support from a number of banks. With the state's money, the bank's money and the money of the investors, as long as the Company's operating earning rate is positive, the Company's profit rate can be amplified exponentially. This is the charm of the land finance and the secret of “profiteering” of real estate companies.
References:
1. Chan, N., 1999. Land-use Rights in Mainland China: Problems and Recommendations for Improvement. Journal of Real Estate Literature 7, 53-63.
2. Yang, C., Wu, C., 1996. Ten-year Reform of Land Use System in China, Zhong Guo Da Di Publisher, Beijing, China.
3. http://english.Peopledaily.com.cn/90001/90778/90862/7163561.html, visited on May 2, 2013.