The Time Bomb In China's Housing Market

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.

Assuming the government doesn't pass a new law guiding land rights or switch to property tax, many homes in China are far more overvalued than anyone believes. Two houses of roughly equal value may stand side-by-side, both selling for 2 million yuan today. Yet if the land rights cost 700,000 yuan, and house A loses its rights next year, while house B is a new home with 20 years of rights, the price of house A should drop to near 1.3 million yuan.

Update: There was an actual case of a house sold in March in Wenzhou, but land rights expired on March 4. The local government told Mr. Wang that to extend his land rights, he must pay 300,000 yuan. He purchased the house for 658,000 yuan.

Although paying such a high percentage for land rights at one time is shocking, China doesn't have a property tax in most cities yet. The property tax could replace the existing system. After all, paying 1.5% of a home's value over 20 years comes to 30% of a home's price (ignoring fluctuating prices and compounding). Or the payment could be spread out over time, turning a one-time rights purchase into something very much like a property tax. Either way, Chinese will pay for the land, but the current system is a potential time bomb because no one is valuing homes as they should based on Wenzhou's situation.

Luckily for China, these problems are still decades away in most cities, with residential land rights typically running 70 years (starting with the sale of the land, not the sale of a finished home).

See also CER: If Beijing is your landlord, what happens when the lease is up?
The bulk of the article is after the jump, with my clean up of the Google translation in a few places.

After the release, Wenzhou city began implementing the "Regulations" state-owned land use right transfer work. The early 1990s, urban areas in the process of allocation of state-owned land use rights transfer transactions, the nature of the allocation of state-owned land use right transfer of property into state-owned land use rights, land transfer and charge.

At that time, in order to successfully advance the state-owned land use right transfer work, without exceeding the maximum number of years of residential land for 70 years under the premise of 20 years to 70 Year stalls by the transferee to choose to handle the transfer procedures and pay the corresponding land amount. And since last year, residential land use rights of these 20-year period expires or impending expiration. We have been concerned about this problem, gradually increase this year.

Most shocking for China is the implications for home values. According to some analysts, land value is extremely undervalued, i.e. home prices are even more extremely overvalued because the land component, which must be repurchased at some point, is much higher than perceived:

Land use rights are undervalued

Mass expectations gap
Reporter: Last year, the department of land is concerned the situation of these 20-year period after the expiration of the land certificate has not informed the public through publication or otherwise, to do the necessary publicity and remind the obligation? For example, land certificate expires, to renew the current necessary to pay very high land transfer of the case?

Zhang: From every land-related laws and regulations promulgated, will be on the national land policy were a lot of publicity, there is the principle of state land use period, we believe that is deeply rooted, the public should know. Lack of transparency in the current real estate market, many people buy a house may not realize the significance of land use rights on the property in the value of the house itself that the white cement bricks, a large part of the value of the property from the value of land. Real estate market information asymmetry, leading to land use rights are undervalued, for renewal, mass psychological expectations gap still exists.

The urban group of the early 1990s residential land use rights expire facing renewed problems in the country may also be the case precedent. We have no experience with this. The media reported the matter, and we think this is a good thing, increasing market transparency.

There's still no national regulation on how this process play out:

How the renewed transfer period expires

Existing laws and regulations lag

Reporter: After the land transfer period expires, how should renew?

Zhang: expired during the "People's Republic of China Property Law" (hereinafter referred to as "Property Law") provides that one hundred and forty ninth, residential construction land use rights, the automatic renewal. But the "Property Law" provides only for "automatic renewal", how to renew, or need to pay land transfer payments and the payment standards are not clear. Up to now, the state has not yet issued the Regulations on the transfer of land for renewal, but did not receive the standard to provide for the renewal of land use right transfer fee. Lagging legislation, such grassroots department of land no laws in actual operation, out of nowhere, you can not handle the relevant formalities for renewal, the inconvenience to the masses.

In countries without specific implementation details of the case, at present we can only refer to the grassroots land department of state-owned land practices, first by a third-party appraisal agency land prices, land prices based on the unit or converted into a floor price, calculate the total land transfer payments re-signed state-owned land use right transfer contract.

How will low income homeowners pay for their land rights extension?

Reporter: people facing the expiration of 20 years or is about to expire, many are working class, even low income groups, to the high one-time payment of land transfer, for they are a heavy burden Moreover, they are from the room or another open hand over the house to buy, for these groups, land department has considered breaks and other incentives?

Zhang: Wenzhou in the implementation of state land use early in the process when the allocated transfer transfer procedures, the use of people in order to pay less land transfer and the choice of a shorter number of years to obtain the transferee of land use right phenomenon exists in a certain range. Now let's assume the assignee, is a bit unfair. We also study the problem, and take three approaches, one is actively reflect to the above, this system needs top-level design, we could not break. Not yet been received very clear answer; the latter two are also working on our place as Wenzhou inclusive policies and programs to solve the opinion, has been engaged in the drafting of the first draft of policy recommendations, the recent discussions will organize relevant personnel to submit superiors, properly resolve such problems. But this inclusive policy, should be developed within the legal framework; the third is for the people now want to renew, we always welcome, and given priority processing.

The cost could run as high as half of a home's price:

Like the difference between new and used cars

Reporter: Existing owners learned the land transfer renewal cost is easily hundreds of thousands of yuan, and their real estate transaction prices do not exceed 1 million yuan, that is to say, if you want to renew, the land transfer cost is about one-third to half of the transaction price. Why so expensive?

Zhang: State-owned construction land use rights have an expiry date, the basic system of state-owned construction land management. Generally speaking, different uses, location, land use conditions, different life and land, the land use right value is different. Land use rights assessment is not what we do, is done by a third party evaluation.

Media reports, Ms. Wang, also looking for before I consulted, I encounter her sympathy. At that time I called her may be less appropriate analogy, land use rights for 70 years of the house, like the 4S shop car versus the house has only two or three years of land rights left, like driving a used car more than 10 years old, the value of which two is high, which is low, anyone can see that. So when Ms. Wang had to buy a house, it's like she paid a high price for a used clunker.

In the state-owned construction land use right transfer, the transfer period different land users need to pay the transfer fee is different. So before a clear policy, the public is advised in advance of the process of the sale of housing land use rights concern in period, do not allow yourself to buy a loss.

This is the opinion of one city official where land rights are coming due, but that message should send shockwaves through

iFeng: 房屋土地使用权到期 需花三分之一房价续地