Infamous 'ghost city' hopes housing coupon system may solve real estate glut

By Global Times – Agencies Source:Global Times Published: 2016/11/14 18:48:40

Governments in China's third- and fourth-tier cities have been creative in tackling their oversupply of homes, such as offering subsidies to rural residents who buy urban properties or offering easier access to mortgages. Erdos in North China's Inner Mongolia Autonomous Region, widely known as a "ghost city" for its huge surplus of unsold homes, has recently experimented with a coupon system which it hopes will solve its real estate crisis. However some are concerned that this smacks of securitization and may actually bring further problems if not properly regulated.

Half-finished residential blocks stand in Kangbashi new district in Erdos, Inner Mongolia in 2013. Photo: CFP

Half-finished residential blocks stand in Kangbashi new district in Erdos, Inner Mongolia in 2013. Photo: CFP

When commodities are associated with coupons, it reminds older Chinese of a time when food and other goods were scarce in China - so scarce that the government issued ration coupons, such as "rice tickets," to cope with the shortage of material goods and to encourage frugality.

But a scarcity of housing was the last thing the government of Erdos, North China's Inner Mongolia Autonomous Region, was worrying about when it rolled out a housing coupon system this April. The local government hopes that transforming part of its huge inventory of unoccupied housing into "fangpiao," literally "housing tickets," will help reduce their massive glut of unsold homes.

Many cities have introduced policies to boost home sales. Meishan in Sichuan Province, for example, is trying to encourage rural residents to buy commercial housing by offering them a 200 to 300 yuan ($29 to $44) subsidy for each square meter of property they purchase. Others, like Shenyang, Liaoning Province, are offering zero down payment mortgages to fresh college graduates.

Reducing the number of unsold homes has been one of China's top economic targets in 2016. Although property prices in China's first tier cities have continued to rocket in the past year, the market remains sluggish in third- and fourth-tier cities.

Data from China's statistical authorities showed that the country had an unsold housing inventory equivalent to 709 million square meters by the end of August, only 9.8 million less than at the end of last year. Most of the sales occurred in first- and second-tier cities, as demand remains low elsewhere.

"Housing coupons are, in nature, a type of cash compensation which aim to help the city digest its housing oversupply," Li Jingguo, a professor at the Institute for Urban and Environmental Studies at the Chinese Academy of Social Sciences, told the Global Times.

But some experts worry that the semi-securitization of the housing market may lead to new issues and even encourage speculation if the government doesn't impose proper supervision.

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Domicile details

Qi Muge, a retired middle school teacher, has been living in a run-down part of Erdos' Dongsheng district for over three decades, and now the local government is planning to rebuild the ramshackle area and relocate its residents.

Rather than compensating displaced residents with cash or moving them to a designated neighborhood, the district government is issuing housing coupons to people who are being relocated. With the coupons, residents can choose a home in one of around 80 neighborhoods on the city's online housing exchange platform.

The housing coupons are officially called "housing exchange certificates." Issued by Erdos' financial authorities, the coupons come in seven different face values ranging from one square meter to 100 square meters. The front of each ticket says the number of square meters it is equivalent to, and on its back is written more detailed information on the type of housing it can be used on, including the location and the average housing price.

According to her districts' renovation scheme and the new housing ticket policy, Qi, who lived in a 160-square-meter apartment, received housing tickets with a total face value of 190 square meters - the additional area is a "reward" from the government - and with the tickets she selected a brand new apartment on the online housing platform.

"The new neighborhood is brilliant, it has a lot of greenery and is equipped with a resident activity center, and we were able to move from a relatively far-off area to a more central location," Qi told thepaper.cn.

Some residents have chosen to exchange only part of the housing tickets they received, and have sold the rest of them. Those who wish to move to an apartment larger than the area their coupons cover are free to pay cash for the additional area.

Inset:Zhang Chuanfu from Fuyang, Anhui Province, holds the housing coupon worth 1.03 million yuan ($150,500) he received as compensation for the demolition of his house. Photos: CFP

Inset:Zhang Chuanfu from Fuyang, Anhui Province, holds the housing coupon worth 1.03 million yuan ($150,500) he received as compensation for the demolition of his house. Photos: CFP

Notorious neighborhood

The government hopes these housing coupons can help revive Erdos' languishing housing market.

Erdos, a city with vast coal reserves, started to attract real estate companies to develop its urban areas in 2003, awarding them coal mining rights in return. And before 2011, thousands of high-rises were built in Erdos, especially in its Kangbashi new district.

But few residents moved into Kangbashi new district, located over 40 kilometers from Erdos' old city center. And as coal demand dropped and the central government imposed limits on local government lending in 2010, the city's housing bubble burst. Many investors had since pulled out, leaving developers unable to finish hundreds of projects. The city's Kangbashi new district became known internationally as a "ghost city" filled with vacant buildings, and the local government has struggled to repay its debts.

Due to this massive glut, the city banned the building of new commercial residential housing since 2014, and real estate developers lowered their prices to unload their assets. Despite these efforts, there were still over 70,000 unsold apartments in Erdos by this September, according to the city's housing authorities. This is in a city that in 2014 had a total population of around 2 million and an urban population of just under 600,000.

In 2015, the Dongsheng government procured 8,842 apartments from real estate developers which residents who will be relocated in the course of urban renovation can buy with coupons. "We borrowed 7.87 billion yuan from the China Development Bank, the Agricultural Development Bank of China and the Industrial Bank of China. We have already received 2.5 billion, and this will be used to buy commercial houses to which residents can relocate," Tian Dongming, director of Dongsheng district's housing and land exchange certificate management center, told thepaper.cn.

Missing regulations

Many real estate developers have asked to be included in the government housing coupon system, even though this means their property will be sold at a lower price. "The price offered by the government is relatively low, but still, most of the owners of the 80-odd real estate projects now on our platform came to us first, as they know the government platform is the only way for them to sell their inventories. Or they will lose more," Geng Tao, an official at Dongsheng's housing and land exchange certificate management center, told thepaper.cn.

The government also hopes the housing ticket system can help relieve the many problems that have emerged in Erdos' housing market in the past decade, including an explosion in private loans and stalled housing projects.

There are a lot of unfinished housing projects in Dongsheng, many of which started during the housing boom in 2009 and 2010. Among the 33,900 unsold apartments in Dongsheng, over 20,000 are uncompleted due to a lack of funding. The housing ticket system allows part of the government's renovation funding to go into the pockets of real estate developers, who can use the money to pay back their loans and finish their stalled projects.

"[The housing ticket system] is able to improve the city's image by removing these stalled constructions, and solve the problem that many real estate developers are not able to deliver the housing they had promised," Geng said.

Li Chun, CEO of Inner Mongolia's Zhengyuan Real Estate Company, thinks the system is a good idea. "The housing tickets are like a locally circulated coupon and certificate. Real estate companies can use them to return loans," he told thepaper.cn.

Li currently has three unfinished real estate projects in Erdos, all of which have been stalled for four years. He also hopes his projects can be included in the government platform. "We will earn no profits with the price that the government offers us. But it's good enough to get rid of the stocks," he said.

The coupon system has already significantly contributed to local sales of housing. According to data from Erdos' housing administration, from January to September this year, 23,124 apartments in Erdos, with a total area of 2.73 million square meters, have been sold, a 131.91 percent rise on last year. The average price of the sold apartments was 3,842 yuan per square meter, dipping 1.79 percent from the same time last year.

But Deng Yongcheng, an associate professor specializing in the real estate market at the Shanghai University of Finance and Economics, warns that the securitization of houses may lead to new problems if the government doesn't properly supervise the process. "This doesn't sound like a good idea. The coupons are like securities, and yet the government doesn't seem to have designed regulations necessary for the issuance of securities," he told the Global Times.

The coupons can be split, transferred or sold, according to the Dongsheng government's official social media account. And the owners of housing tickets are allowed to freely transfer their tickets, without paying the taxes that usually accompanies housing transactions. "This is designed to encourage residents to transfer the coupons that they don't need to people with housing needs," Geng said.

But the circulability of these coupons have also given rise to agents and speculators who buy the coupons up at a relatively lower price, and sell them at a higher price. Because housing coupons have limits in terms of the housing projects they can be used on, owners of coupons usually try to sell them at a lower price.

Wang Rui, a real estate agent, has invested 1.8 million yuan in buying cheap housing coupons from buyers, according to DragonTV. "Even though the price of housing coupons are dropping, the government won't allow it to drop too low because then people won't agree to be relocated," he told the news channel.


Newspaper headline: Property on paper


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