How China’s residential land sales work

March 20, 2017 / By  

In China, soaring land prices have traditionally been viewed as one of the primary contributors to a vibrant housing market. Since last October, local governments across major Chinese cities implemented cooling measures via new land sale measures on top of tweaking Housing Purchase Restrictions (HPRs) already in place.

One of the most popular measures has been to set a price ceiling in residential land auctions. If there are multiple bidders bidding above the price ceiling, the auction enters another stage where bidders are asked to bid on the public housing provision attached to the site. The bidder bidding the largest floor area of public housing provision will win and pays the government’s price ceiling as the transaction price. The public housing provision that forms part of the deal will be handed to the government free-of-charge after completion.

This auction format was originally pioneered by the Guangzhou government back in 2011. Many other cities have adopted this practice since last October. The price ceiling set by many cities takes the form of a premium rate above the reserve price and is city-specific. The premium rate can be as low as 30 per cent above the reserve price, such as in Shenzhen, or as high as 150 per cent above reserve, like in Hangzhou. The public housing provision in terms of its portion against total planned GFA can also be very significant, with 20 to 50 per cent being commonplace.

Such auction formats reduce the total price paid by developers while increasing much needed public housing supply. However, whether the new approach actually results in lower land prices or helps stabilise home prices remains to be seen.

Although total government land revenue is capped, the true accommodation value of the private units is yet to be realised, since the proportion of land used for building private units will be eroded by substantial public housing provisions. Evidence of this can be seen in Guangzhou, where accommodation values have actually risen under the auction format. Moreover, the effect on home prices has had the opposite effect given that the new format reduces the supply pipeline of private units.

Based on what we’ve seen in Guangzhou, it’s unlikely that the new auction format will help stabilise home prices. So even though a number of cities have adopted the new auction format, local governments are unlikely to find any relief in controlling fast-rising home prices.

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