Monday, July 27, 2009

Housing Stir-Frying Groups


Who is Pushing Up Housing Prices?
Is the Impetus Housing Stir-Frying Groups [chaofang tuan]?

China Securities Journal article from about the origins of rise in urban housing prices. Housing “stir-frying” groups (chaofang tuan, or 炒房团 ) refer to groups of investors, usually believed to be from outside the city where housing is purchased, who come in and scoop up all the apartments for sale, usually before the public is given a chance to buy, and in collusion with the property developer. The lack of supply drives up prices, after which the group sells out making a quick profit. The most infamous “stir-frying” group comes from Wenzhou and is believed to be responsible for Shanghai’s high real estate prices.

Note: “stir-frying” (chao, 炒) is a word in Chinese that applies not only to housing but to stocks, stamps, and other goods (like chaohuo or flipping goods between stores in Zhongguancun). It is sometimes related, in English, to “cornering the market” where a good or commodity of limited amount is bought up and made scarce, raising the price, and then sold back to turn a quick investment. Hence one could argue “stir-frying” is a way to turn a quick profit by quickly “heating” a scarce thing. The link with quick frying in cooking is definitely a component of the meaning. The awkwardness of translation is compensated by richness from the centrality of food to China and the meaning of the word in Chinese.

Original article from CSJ:

Illustration: Person is “Housing Purchaser”, house reads “Housing Price”, wok reads “real estate market”.

Recently, there have been reports stating “the impetus of housing purchases is still housing stir-frying groups” instilling more than a little surprise in people. The reports refer to an investigation organized by a certain university college: researchers directly surveyed 2,000 consumers in 40 cities by phone and found that 32.1% felt that the next 3 months was a good opportunity for buying housing while 32.7% felt it was a bad opportunity. Using this they come to a conclusion: statistically, since positive and negative views balance, “basically it can be certified that the impetus for buying housing is not from direct consumers but from investors”.

Beginning in September of last year, central and local governments issued multiple control and regulation policies aimed at the housing market, lowing transaction taxes and supporting the purchase of housing by residents. In February the market began to warm and by May and June it became white-hot. According to data released from the Bureau of Statistics two days ago, in the first half of 2009, 14.43 million square meters of commercial residences were sold in Shanghai, an increase of 34.8% over the same period from a year earlier, with a total sales revenue of 168.773 billion yuan, an increase of 88.5%. Sales of housing in stock registered 10.6241 million square meters, an increase of 35.3%. Because real and improved living demand has been unleashed with housing needed for weddings and by students, sales volume has clearly increased and pushed up housing prices. The phenomenon of standing in line to buy housing has appeared at some hot properties. Here, whether it is from the figures of agents or middlemen, it is the end-user buying to live in the property who is the vast majority. Government department spokespeople have also said that it is not investors who are in the majority.

Of course, demand is made up both of consumption by end-user livers and of investment. Mature housing markets are inseparable from these two types of demand. The situation in Shanghai these days results from investment demand that was clearly unleashed in May, while April was the month when real and improved living demands held up the market triggering movement from investors. In the second-hand [used; most housing in China is new] market, investors have either sold out or entered the market. According to statistics from intermediary organizations, in the central areas of certain cities, nine-tenths of owners who sell out originally were investors and they plan to move cash into other investment channels. Meanwhile, long-term property investment at the two levels of 5-6 million yuan and 8-10 million yuan are undertaken by investors entering the market, and their number made up 30% of total transactions of high-end housing in May.

Besides long-term investment, there is also short-term investment. Short-term investors are usually thought of as speculating through stir-frying housing, for example stir-frying apartment patterns [chao louhua; apartment pattern refers to “off-the-plan” property, property that is under construction] or short-term changing hands. Stir-frying apartment patterns means transactions in housing that is not finished, and was once in fashion but is now forbidden by government policy; short-term changing hands means buying and selling quickly when the price of housing is rising rapidly, or buying in a future house and selling once it is finished to reap the price differential.

It is undeniable that over-investment is more likely to create a housing price bubble. Relevant departments have pointed out that an investment proportion restricted to less than 20% is crucial to avoiding risk. Also, it is key to control investors using bank loans to stir-fry housing. This type of behavior has been amply documented, for instance in Shenzhen in 2007 there was a craze in the housing market and statistics show that investors made up 38% of the market.

Ending the sale of unfinished housing, collecting taxes on the sale of second-hand housing, and tightening loans for second apartments are the measures adopted by the government to control investment and attack speculation. But Shanghai annual statistics show that investment in housing accounts for less than 20% of all transactions, and even for some high-level properties it accounts for less than 40%. Some apartment complexes have more than half that are investors but these are individual cases.

The key drivers and majority for housing purchases are the decisive operators of the changes in housing prices. In the housing market of today that has been heating up for less than half a year, saying “currently the impetus of the market is housing stir-frying groups” is an exaggeration.

On July 17, at the Work Meeting to Encourage the Healthy Development of Shanghai Real Estate, the city government emphasized that the supply of land should be increased, with a special emphasis on the supply of land to be used for ordinary commercial residences. Focus should be on encouragement of starting work and making sales while being firm in investigating illegal and out of line behaviors such as holding back on development for increased price and fake transactions. It is clear that the goal is to increase the amount of supply and the speed it is made available. If the current impetus for housing purchases is housing stir-frying groups, that should control demand and restrict the purchase of housing for investment.

There are many problems to research in the housing market but analysis must use practical reality. Reaching foregone conclusions will only mislead consumers and interfere in the implementation of government control and regulation policies.

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