Fervor And Other Forces in Nanjing’s Property Market

No matter what the Nanjing government has tried to do in recent months—sometimes pressed by Beijing--the property market here had remained red-hot.

That is, until earlier this week, when the sale of some major land plots in the city suddenly attracted few or no bids.

The reason, we’re told, is that Nanjing started to set price ceilings on the property that was recently made available for new housing, thereby decreasing the profits developers could expect. Moreover, new rules stipulated that no one could bid above the maximum price set by the government (a common practice by developers to attempt to close out any competition by showing resolve and hinting at inside connections).

That measure follows an announcement at the end of May that those developers who had been especially successful in recent property acquisitions--by buying and then sitting on property waiting for even higher prices---could find themselves closed out of new auctions, or at least have their previously accepted bid cancelled.

Nanjing also put out nearly a dozen additional pieces of land for sale, so as to “increase supply to stabilize market expectations.” Greater supply should lower prices, and start to put the damper on property fever here.

It would be heartening to think that these efforts will have an immediate and important impact on Nanjing’s housing market. But that’s questionable.

For one, Nanjing--despite its impressive efforts to develop areas that border the Yangtze River and its incorporation of counties and townships to the east of the city in recent years—still has what commentators here often refer to as “a contradictory imbalance of supply and demand” [供求矛盾失衡]. What they mean is that the housing market in Nanjing resembles other economic phenomena in China that carry potentially serious social consequences:  The situation doesn't correspond with conventional economic models, and State intervention is required to limit the effect of the condition, lest the imbalance pose a serious social impact.

So, city governments are active in trying to regulate what they themselves have helped create, by standard policies (acquiring land to cope with urbanization, selling land to finance physical and social infrastructure for the same reason) and then even further policies to keep matters from getting even more unbalanced. But trying to regulate supply and demand hasn’t worked so far, and it’s unclear if these recent tweaks will do the trick--especially as the largest land owner in Nanjing is the military, and they’ve always been eager to hold on to what they already have, so there’s only so much the city authorities have to work with anyway.

Plus, there are two other forces working against a sudden slowdown in sales.

One source of those forces is macroeconomic.

Nanjing, like every other major city in China, derives at least half of its annual revenue from land sales when the property markets are alight. In recent months, sources indicate that property transfer fees alone—the transaction tax that sellers and buyers pay to the city government—doubled over the same period last year. Turning off that faucet isn’t very attractive, especially amidst a general economic slowdown in the province, making revenue an even greater requirement.

The other important dynamic is microeconomic—varying by specific city but subtly quite powerful in Nanjing at least.

Property sales have created embedded interests: stakeholders in Nanjing who would lose if the property market comes to a screeching halt.

Forget the developers and their political connections; the banks carrying enormous debt; and the homeowners seeking to pay mortgages of dubious value in the event of a steep downturn.

Think instead of the sales offices that have taken over empty retail space; the salespeople (usually very young) who now have jobs when their university colleagues are scrambling for positions of their own; the various restaurants whose business is booming because they’re serving people either looking for apartments or celebrating their recent purchases. And then there are the decoration companies, the contractors, the laborers, the recyclers, and the like. All have gained through the present passion in Nanjing for property—and officials know they need protecting as much as the people buying it.

Observers from the outside looking into China’s housing market often speak of the coming collapse or catastrophe that awaits. They’ve been consistently wrong in their predictions, in large part because they neglect the local.

Nanjing officials know better. They may not have all the answers, but they see the conundrum very clearly.