I’m shocked, shocked
By: David A. Smith
For as the sun breed maggots in a dead dog, rapid real estate development breeds municipal corruption – and when the profitability is great, so too can be the corruption, including the massive patronage potential inherent in affordable housing – as revealed in a Financial Times article, Property boom stokes corruption in China:
China’s push to build cheap housing for low-income families is being undermined by some local governments that are using the policy as a front to provide public officials with sweetheart property deals.
I’m shocked, shocked, to find patronage going on here
[I've previously posted at some length on China, including its emerging property rights jurisprudence, whether it has a housing bubble (answer: yes), how China may try to ease the bubble, its affordable housing shortage (also yes), its questionable building codes, and its interest in modernization at the expense of historical significance. – Ed.]
After all, if some apartments are affordable, why not give them to the most deserving, and who more deserving than the mayor’s friends and contributors?
In Xinzhou, an industrial town in central Shanxi province’s coal belt, a new complex of smart apartments called Century Garden was on the local government’s list of designated social housing.
Xinzhou province in red, Shanxi in orange
Instead, almost all the 1,578 apartments have been reserved for local officials, some of whom have already resold the apartments at considerable profits before construction is completed.
In that sentence lie multiple flaws in the programmatic design:
1. Ownership, not rental. As we saw in Affordability for Whom?, affordable ownership schemes always have an inherent programmatic tension between ongoing affordability for successor owners and wealth building for the lucky first buyer.
Parallax on risk has the effect of changing one’s views without one noticing they have changed.
Before I moved into my nice low-cost home, I was all for having the opportunity shared among all community residents.
After I have lived there for some time, I have persuaded myself that the home’s appreciation is due to my presence – my labor, my tending, my foresight in selecting this property to buy – and I see little reason to hand over the value created by me (as I see things) to someone else.
It is all about me, isn’t it?
Rental has no such ongoing tension, because it’s understood that the affordability value is occupancy interval, hence begins at move-in and ends at moveout. And it grows the economy, often better than homeownership.
2. No income qualification. The housing is defined as affordable based solely on its price, without regard to the target population: household income, the household configuration (e.g. families, elderly), possibly key-worker employment considerations or workforce housing.
We deserve affordable housing
3. No resale limitation. If one is going to have affordable homeownership, then at a minimum it should have a multi-year occupancy requirement before any resale can occur – of it a resale must occur in that interval, then the resale price should be the original purchase price, giving the homeowner the benefit of mortgage amortization but no appreciation. Indeed, limiting appreciation could and probably should be an ongoing requirement, which can be accomplished in many ways:
a. Limited-equity co-operatives
b. Shared-appreciation financing
4. Effective registry of title. A restrictive covenant recorded with the land (and hence both senior to any financing and referenced any time there is a transfer of title) would sniff out any sweetheart deals.
In America, we know nothing about sweetheart deals
Actually, from the perspective of a subornable public official, these ‘flaws’ look like features – for they allow the public official to deliver a lovely, large, lump-sum benefit to favored colleagues, all off balance sheet – no money actually changing hands.
The Xinzhou case is one of a string of revelations about cut-price flats for local officials that have emerged just as Beijing is ramping up its plans to build social housing.
When there is rapid development, there will be rapid up-zoning, which means that urban land will be skyrocketing in value.
Just upzone, and stand back!
The choice of which land gets the value boost will lie with local officials – who in China have a great deal of autonomy.
No Chinese is gonna teach us anything about graft
The scandals are becoming the latest flashpoint in the combustible politics of China’s housing boom, which has transformed the living conditions of tens of millions in the past decade but which is increasingly creating a disaffected rump of citizens left out of the real estate bonanza.
When real estate is scene as a wealth elevator, it loses its appeal as a family incubator.
“You are never going to get rich if you do not do anything illegal,” says Wang Zhu, a 60-year-old former policeman who has a three-room, brick house across the road from Century Garden in Xinzhou and runs a small flower shop.
When you have a culture of corruption, you will soon have a culture of non-compliance, for the observant herd will have observed that who know you matters and what the law is does not.
Social housing has become one of the Chinese government’s main priorities, including the promise to build 5.8m apartments for low-income families this year. The goal is to reduce social tensions surrounding the rapid rise in house prices [Which we've explored in depth – Ed.], while ensuring that the clampdown on property speculation does not cause a collapse in real estate construction, one of the main drivers of growth.
Except that the tensions are rising:
The shortage of cheap housing in Chinese cities is connected to a number of other prominent social problems – it is one reason workers at manufacturers such as Foxconn, which has been rocked by a string of suicides in the past two months, live in cramped company dormatories.
Speed – quality – flexibility – rabbit warrens – suicides
Working people hard and deferring their rewards, while cramming them into ‘ant tribe’ housing, is a sociological time bomb.
There will come a time when attitude turns militant
Government jobs have often provided access to subsidised housing, especially in Beijing.
Ever since the mandarins, rulers have known that they can assure loyalty through bestowing favored housing upon their bureaucrats.
I’ll take care of your housing, you take care of my throne
However, critics claim that the social housing policy has in some cases become an excuse for local officials to game the booming market.
Mayors have a lot of power, and they can be tied to property developers.
“A lot of the social housing has ended up going to public servants,” says Hu Xingdou, an economist at the Beijing Institute of Technology. “It is a sort of invisible corruption. The policy has become a channel for officials to grab public resources.”
Off-budget, non-cash (but liquefiable!) bribery is among the hardest forms to catch, and therefore the hardest to resist.
“I can resist anything but temptation”
In Rizhao, a city in eastern Shandong province, a complex of 3,500 apartments designated as social housing, some with sea views, was sold to local officials at prices 30-50% below market values.
More than likely, many of them immediately flipped the housing into the open market, thus lining their pockets with graft and doing nothing whatsoever for housing affordability – while embittering those who expected their government to do what it promised.
In Meixian, in the central Shaanxi province, around 80% of the city’s first social housing development, called Urban Beautiful Scenery, went to local officials.
We know nothing of such kickbacks
That’s appalling. Why am I unsurprised?
“We are quite sceptical about the prospect for subsidised housing,” says Michael Klibaner, head of China research at property group Jones Lang LaSalle.
Skeptical with a c: Klibaner with a k
“There is not much transparency about the plans for affordable housing.”
As the saying goes, “The mountains are high between Beijing and the provinces.”
Beijing nowhere in sight
Under Beijing’s instructions, if local governments want to allocate new land to residential housing, they must ensure a significant proportion goes to projects for affordable apartments, which can charge lower prices because they are usually exempt from certain land use fees. In some cities, developers say the new rules and pressure from Beijing have forced them to build more cheap and small flats.
Upzoning prints invisible money. If you then turn some of it into affordable housing, good – until you sell the affordable housing to your political buddies.
However, in Xinzhou the local government has admitted that the Century Garden project should not have been part of the quota of affordable housing and has set up a special inquiry.
Now that they’ve been caught, that is.
Prof Hu and other critics argue that local governments should dramatically step up efforts to build public housing for rent, rather than relying on rules that encourage private developers to build cheaper flats.
According to Citigroup, only 4.4% of investment in real estate last year went to social housing, falling to 3% in the first four months of this year.
I agree with the rental part – less so with the government being directly involved. Government makes a very poor owner, and the opportunities for patronage and graft are just as numerous, and much harder to ferret out.
“Your winnings, Captain Renault”
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