I just came across an interesting story about how the city of Changsha, the capital of Hunan province, aims to put a lid on soaring real estate prices. They’re going to cap the bids that developers can make in land auctions. According to the report, “the winning price cannot be more than 50 percent above the starting bid. In the event that more than one developer puts in the maximum-allowed bid, the winner will be decided by a lucky draw.”
This is not a way to cap prices for home buyers. This is a way to give away money to real estate developers. Developers bid at auction to buy long-term land use rights (70 years in the case of residential land). The seller is the state. Yes, you read that correctly. The local state (Changsha) has decided to limit its own revenues from land auctions. If the market value (what developers are willing to bid) is higher than the cap, instead of taking that value from bidders and using it to, oh, I don’t know, maybe build schools or pay building inspectors, Changsha has decided to just give it away to the lucky real estate developer who wins the draw. The idea that somehow this will lead developers to voluntarily lower the price they charge on the residences they build is such a fantasy that it’s virtually impossible to think any of the architects of this policy could actually believe it. More believable is that this policy was designed by the local real estate industry for the local real estate industry.
But wait, you say (if you clicked on and read the story carefully): doesn’t Changsha also have controls on what developers can charge when they sell what they’ve built? Apparently yes, but even if such controls were actually effective and could not be evaded (an unlikely scenario), it doesn’t matter. Remember that by hypothesis, the lucky draw for excess value kicks in only when developers, bidding for land under the current system of price controls, believe that the market value is still higher than the cap. It’s a giveaway no matter how you slice it.
Thanks to Bill Bishop’s Sinocism newsletter for the tip on this story.