Another giveaway of state assets to real estate developers

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.

4 thoughts on “Another giveaway of state assets to real estate developers”

  1. Don Clarke is right to smell something, but I am not sure i would draw the giveaway conclusion. The “interesting article” is blocked for me in Hangzhou, but a couple of comments – (1) in Zhejiang, it is customary for developers to build schools and other infrastructure as part of their bids; not sure what they do in Changsha; (2) there is little about this system of first tier land sales that resembles a market. You know that developers are graded and rated on various criteria before they are allowed to bid, sort of a vetting system, but as a practical matter, limited to favorite potential buyers; (3) it is right that price controls alter the distribution of costs. Just as price controls or limits on number of units purchased can be gotten around, so can controls on first tier sales. Everett Dirksen (I think) said that sometimes he could smell the meat a’cookin in Springfield. Same might be true here. (3) I have suggested to friends in a couple of different land bureaus and urban planning departments that a way to reduce costs, expand opportunities, create jobs, and create more interesting urban form would be to cut development parcels into many smaller biddable pieces, thus expanding the supply of developers and (possibly) forcing the issue of greater meaningful inspection of construction work (that work now is regularly ignored by the developer, except for bigger state projects). All my friends just shake their heads – crazy American. But it would be good to make this land sale system into more of a market.

    1. Thanks for your comment. Try this link:
      Not sure that any of your comments affect what I see as the fundamental fact: in some cases developers (by hypothesis) will be willing to pay more than the cap. But the state will sell the land at the cap price. This means that the state is giving up revenue it could have had. To whom does the corresponding gain go? The developer who wins the lucky draw. I can think of no sound public policy reason for this freebie to developers. They are not going to lower their prices in response. If citizens were willing to pay $N/unit area before this scheme went into effect, why would they be less willing now? And if buyers are willing to pay that much, why would developers sell to them for less than they’re willing to pay?

      1. The link worked. Thank you. Yes, I agree, there is no sound public policy reason for this policy. But as I think David Cowhig suggests below, and as you know, sometimes things are done for other than western public policy reasons. This public policy may not mean that developers pay less, only that they pay someone else other than the city government. If the savings go to related parties, then of course, you are right. This is a giveaway to the developers.

  2. Good catch. I can’t decide whether this is socialist virtue or somehow a way to spread money around using Lady Luck as a cut-out so the anti-corruption squad from “In the Name of the People” won’t be sniffing for a deal between some government officials and a particular company. This system would also work if relatives of the Changsha city officials are running some or all of the real estate companies. There would be no direct line from an official to a particular company that got a deal at a concessionary price. Lady Luck decided it all.

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