Changfeng Ling: Top-down Planning or the Market? China's Real Estate Industry at a Crossroad

by Colleen Qiu, Ph.D. Candidate, City Design and Development at the MIT Department of Urban Studies and Planning

In the past two decades, the real estate sector has been the largest pillar industry of China’s economy. Since China ended its socialist public housing system in 1998, a strong housing market has enabled China’s massive urbanization which is unprecedented in the world in terms of its scale and speed. Today, restrictions imposed on housing prices, purchases, and sales seem to suggest market failure. What could be the fundamental cause for that? What choices is the real estate sector facing today? Reflecting on China’s real estate sector at a crossroad, Changfeng Ling, executive director of China Property, Hongkong Land, visited MIT on May 16, and delivered a talk for the China Talk Series hosted by the Samuel Tak Lee MIT Real Estate Entrepreneurship Lab.

Ling joined Hongkong Land in 2005 and was appointed Head of Residential Property, China in 2015. As the executive director, Ling is responsible for identifying and managing all residential and mix-used property investments in China. From the perspective of a Chinese developer, Ling began his talk by observing that a city like Boston seemed to have abundant developable land and could provide ideal opportunities for real estate development. The availability of developable land has been a top issue for China’s real estate sector. There are over 30,000 real estate developers in China today, whose businesses are largely contingent on opportunities in land acquisition. Land grabbing has become a competitive game directed by the state that seeks to control the real estate market through manipulating land- and property-based regulations.

Ling’s talk centered on a series of problems in how the state had been regulating real estate practices and land resources, parsing the challenges China’s real estate sector had been facing today. Ling observed that land acquisition for the developers was based on luck today. The current processes of land grabbing, led by the state, are highly contentious and have fundamentally caused housing shortage, overpricing, and unbalanced supply. China has a complex system of land auction regulations. When the highest bid goes beyond a capped price, the result of that auction is based on lottery, namely, luck. With this lottery system, it seems unnecessary for investors to conduct any site surveys and market research in advance of land acquisition. Predetermined maximum prices set by the government have led to highly predictable final land sale prices. The difficulty in land acquisition has generated a public opinion of land shortage. Land has been perceived as scarce resourced in the real estate market. Ling argued that this scarcity in new, developable land had caused land price to increase continuously.

In addition to land sale lottery system, Ling pointed out that housing purchase eligibility also depended on a lottery process in a hot real estate market such as Shanghai. Through manipulating land sale prices and housing purchase eligibility, the state has been constraining the developers from both acquiring land and selling housing units freely. Land and housing prices are no long subject to market rules. With the state heavily intervening the allocation of land resources and housing supply, China’s real estate market has become powerless in self-balancing. Ling argued that such state control against market autonomy could be highly problematic, opposing a liberal market since China’s economic reform and leading to social injustice and housing inequality that Ling continued to elaborate in his talk.

Can housing price be controlled through state intervention? Ling reflected on his practices in the real estate sector and provided insights regarding the effectiveness of the price control regime. In China, the Administration for Commodity Prices is responsible for approving housing prices. According to statistical records in multiple cities, housing prices started climbing as soon as price-cap regulation was imposed by the state in that city, such as Nanjing and Chongqing. Ling argued that empirical evidences seemed to indicate the failure of price-cap regulation.

How did China establish its land politics? Ling suggested that China had mimicked Hong Kong’s land regime thanks to the instrumental role of Chun-ying Leung, who was a member of the Hong Kong Basic Law Consultative Committee in 1985, and has been the Chief Executive of Hong Kong since 2012. Ling pointed out that Hong Kong had the most severe housing shortage in the world today. Hong Kong’s real estate sector demonstrates a full range of problems, including severe housing shortage and extravagant land and housing prices. Hong Kong’s cityscape consists of numerous high-rises, many of which are constructed four times of the regulated floor area ration (FAR). In Hong Kong, recently, land transaction price can be as high as 500,000 HKD per square meter.

Drawing lessons from Hong Kong’s experience, Ling continued to depiect whether housing price could be regulated and what externalities price control could engender. Hong Kong’s housing price dropped only once ever in history, which happened in 1997, when Hong Kong’s first Chief Executive Chee-hwa Tung proposed to built over 80,000 housing units. At that time, this amount equaled that of two to three years of housing supply in Hong Kong. It could accommodate roughly over 2 million people (out of 7 million people in total). As soon as this plan was announced, housing prices in Hong Kong dropped drastically, and it brought about a wave of political turmoil against Tung’s administration. This example showed alternative means to reducing housing prices. Unlike China’s high housing prices and high taxes, Hong Kong has high housing prices but low taxes; the latter could be a somewhat effective means to balancing social welfare. Learning from Hong Kong, Ling further argued that when housing prices fluctuated drastically, it threats welfare for the entire society.

Ling further explained that the scarcity of developable land had been a perceived, false condition resulted from deliberate state control. Large cities such as Hong Kong, Beijing, and Shanghai actually have large percentage of land areas that are suitable for new developments. However, due to state control, only about 7% of land areas in Hong Kong is developed; development on the rest is highly restricted by the state, such as those open spaces designated for educational parks. Such limitation on developable land is more evident in China, where land market is also monopolized by the state. Local governments’ revenues rely heavily on land-based financing, with 70% revenue generated from land sale for most cities and up to 90% in some cases. In heated housing markets such as Hangzhou, the government has refrained from selling large parcels of land in order to create competition over land and drive up land prices.

Ling compared conditions of housing demand and supply in mainland China to demonstrate the imbalance in the housing sector resulted from failure of state control. China has three megaregions of urban agglomeration: Bohai Rim region, Yangtze River Delta region, and Pearl River Delta region. Population continue to migrate into these major cities for better quality of life, creating uneven developments between the eastern and western provinces. Despite the government’s urge to limit total population in major cities such as Beijing and Shanghai, Ling believed that this eastward migration trend would be extremely difficult to stop or reverse, if not impossible. Housing demands in these cities will continue to grow and any attempts to impede the growth could end in vain. Currently, China’s Ministry of Land and Resources is in charge of allocating land resources for new development. The developable land quotas for eastern, growing cities (mostly first- and second-tier cities) are highly limited while those for the western, sometimes shrinking cities (often third- and fourth-tier cities) are higher than necessary. Despite the state’s wishful thinking of supporting westward urbanization and reducing inter-region disparities, such centralized regulation has only resulted in worsened housing shortage in regions with high demand and exacerbated the imbalance between housing demand and supply.

In addition to restricting new, developable land, land use regulations further hinder sufficient housing provision, especially in large cities. Ling pointed out that land use designation and FAR control were some other regulations that had contributed to the imbalance in China’s housing sector. On one hand, the government usually designates desirable, developable land mainly for industrial and commercial developments in the hope of attracting new businesses and generating more sustainable, taxable incomes. On the other hand, the allowed FAR on the already scarce residential land is rather too low (about 2.0 in Shanghai). All these seemingly rational regulations aiming at achieving inter-region equality have been working against market rules and driving up housing prices continuously, fundamentally causing market housing to be exclusive to the few who can afford. What is more exclusionary, the unbalanced state regulation has generated a “black housing market” where not only purchase eligibility but also access to information demand extra informal fees equal to tens of thousands of yuan.

Despite the monopolized land system and housing inequality in China’s real estate market, Ling concluded his talk by proposing a series of recommendations for potential improvements: 1) to reform land regulation, such as adjusting land use plan and FAR control according to market demands; 2) to encourage transaction of rural land and integrate rural collective economy into the urban systems; and 3) to create additional large, first-tier cities and allow for regional autonomy and flexibility in land regulation and resource management. The talk was well-received by the audiences, who were mainly students, scholars, and faculty members in fields such as planning, architecture, real estate, economics, business, and public policy. At the end of the talk, the audiences discussed with Ling about a series of trendy topics in urban development, such as alternative approaches to land financing, the establishment of Xiong’an New Town, the potential impact of the “One Road One Belt” policy, and the provision of rental and affordable housing.