Turning point? – what are the signs

November 29, 2011 / By

Stories are starting to circulate about local governments changing or ‘easing’ the payment terms for land auctions. Among the key elements of the current residential market policy tightening regime which have been in place since late 2009, are those designed to disincentivise land banking. The government wants developers to be building, not stashing land for the future. One particular tightening policy was the requirement developers pay 50% of the value of the land within 10 days of winning an auction and the balance within 1 year. This was in stark contrast to the earlier requirements where developers had to put 20% down, and often got away with putting down far less upfront.

By significantly increasing the amount of capital developers have tied up in their land bank, it makes it much more costly for them to sit on idle land, theoretically giving them a financial incentive to start construction sooner rather than later. Currently the financial stress the developers are feeling from the combination of the liquidity squeeze, lower transaction volumes, and more widespread price discounting, is greatly reducing the demand for land and local governments are starting to notice.

With demand for land softening, it seems like an obvious move to change the payment terms back to the old structure of 20% upfront, but this is an area where the central government’s intentions are not aligned with the local government’s desires. The central government is still quite keen to reduce the land banks being carried by developers because the root cause of the entire ‘problem’ with China’s housing market is one of lack of supply against 50 years of pent up demand – it wants that land developed, not ‘banked’. However the local governments get 30 – 40% of their revenues from the sale of land use rights, so a material change in those revenues, at a time when they are being pushed to finance social housing programs and will have to start rolling over debt from the 2008/2009 stimulus-led infrastructure projects, is not a welcome development.

How this situation plays out will be telling in terms of the tug-of-war between the central and local governments on the timing and pace of policy easing for the housing market. Watch this space.

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