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May 5, 2011

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'Affordable' housing prices soar beyond reach

IT has been reported by local media that as local families entitled to affordable housing are due to choose units of their liking next month, some have learned to their dismay that these houses are no longer so affordable.

The "affordable" housing priced at about 3,500 yuan (US$500) per square meter last year has climbed to 5,000 to 9,000 yuan per square meter.

This is too high - and not just for families with an annual income of less than 40,000 yuan, which is defined as being low-income.

The report blamed the soaring costs of affordable housing on government's dependence on land sales.

This has been vehemently denied.

An official from the municipal department in charge of housing asserted that "the affordable housing price in Shanghai has never soared! The government has not made any profits! All land for affordable housing projects has been transferred free of charge, bringing no fiscal revenues to the government!"

As to affordable housing priced at over 8,000 yuan, the department explained that the costs of affordable housing are comprised of building costs, which are soaring, plus 2 to 3 percent profit margin for the developers.

That explanation might not allay the discontent, but it did confirm one thing, that 8,000 yuan is very real.

Is 8,000 yuan per square meter a reasonable price for low-income families?

Well, the price itself is very reasonable in a market where the average housing price has long exceeded 20,000 yuan per square meter.

Apparently, the introduction of purchase curbs deemed the most stringent so far has yet to bring down the prices.

There are signs that after months of standoff between buyers and real estate developers, the buyers are bowing down, again.

The trouble with affordable housing is that even this marked-down price of 8,000 yuan is way beyond the affordability of most local residents, low-income or otherwise.

Note: "Residents" automatically exclude the millions of migrants, a segment of the population who are almost solely responsible for building the city's dwelling units, but whose lack of city household registration means they have forfeited any claim to affordable housing.

But when even college teachers in their prime began to express their inability to own a flat at its market value, in a recent front-page Wenhui Daily column, the housing problem is by no means restricted to low-income families.

China's affordable housing project, however ambitious its goals, cannot possibly cover more than a small fraction of the population.

And local governments lack the political incentives and the funding to construct low-income housing.

Large-scale construction of affordable housing, by dampening the real estate market, would reduce land sales, on which the local governments are now heavily dependent.

Similarly, though real estate developers show little inhibition in snapping up commercially lucrative tracts of land at ever high prices, they show little enthusiasm for a submarket-return affordable housing project.

Land sales vital

Ironically, considering where local governments derive their chief income, even the affordable housing projects need to be financed in a large measure by land sales.

For 2010 the central government vowed to build 5.8 million units of affordable housing, while the actual number completed was 3.7 million units.

This year the government has rolled out a scheme to build 10 million low-income units.

Xinhua reported on Tuesday that the 10 million units of affordable housing units need an investment of 1.3 trillion yuan, of which 500 billion yuan would come from central, provincial and local governments "through various channels."

The report concluded that "for local governments, how to ensure the funding remains a grave challenge."

Another challenge is to ensure that these units, when completed, really go to those who need them, rather than to BMW-car owners, or civil servants.

But the question of fairness becomes more complicated in a situation where the majority of the residents have been effectively priced out of the real estate market.

Why should one person earning 3,000 yuan a month be entitled to a house, while another earning 8,000 a month is not similarly entitled, though both cannot afford the market price?

Clearly, the only solution requires the government to aggressively bring down home prices, a situation too horrible for any government - whether central, provincial or local - even to contemplate.

On the contrary, governments are ready to come to the rescue of real estate developers at any time, and this readiness has been driven home to both home sellers and home buyers during previous control cycles.

So even while we are witnessing some of harshest curbs on housing purchases, every developer is confident that these curbs can disappear at any time.

The recent surge in housing sales is a good indicator of this sentiment.


 

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