Cheap labour is frequently given as the basic factor underpinning the low cost to us of ‘made in China’ goods but is there another, more fundamental factor.
We don’t talk about ‘land’ very much in western societies save as real estate and its very reliable capital appreciation over the years. This reputation of capital appreciation, combined with associated tax breaks and huge lending by banks, has seen significant inflation of property prices, reinforcing the capital appreciation trend and attracting many investors to the market to the detriment of would-be owner-occupiers.
Many Australians will never get their ‘foot on the ladder’ and will rely on the rental market to meet their housing needs; for many, rent will be their biggest household expense. Those with secure and adequate incomes will often be allocating 30 to 40% of their disposable income in mortgage repayments on the house of their dreams. Anecdotally, land now is about 50% of the cost of a home purchase – previously about 30%.
The point is that access to land in Australia has become very expensive and is the great unmentionable social inequality. Nevertheless, increasing land/real estate prices are widely applauded, as a sign of the nation’s increasing wealth and it would be a disaster if a decline occurred.
But supposing citizens did not need to allocate such a large proportion of their income to having a secure home, that they were not trying to buy a piece of their country on which to live? Their income need not be as large – labour could indeed be cheaper if access to land were cheaper!
Land tenure in China is quite different to our system and has been evolving since the revolution. The Wikipedia entry, Chinese property law, is extensive, well-referenced though in some passages seems contradictory – maybe has some translation glitches; some wording indicates a ‘western’ view of real estate.
Here are some relevant quotes:
· In general, rural collectives own agricultural land and the state owns urban land.
· Foreign investors are not allowed to buy land in China. The land in China belongs to the state and the collectives.
· In the era of Deng Xiaoping, a fundamental legal source of the regime of property and property rights in the PRC lay in the Constitution of PRC enacted in 1982.
· The most recent development would be the enactment of the Property Law in March 2007 (after 14 years of debates), which is noted as one of the most important core components of the evolving civil law in the PRC.
· A land user obtains only the land use right, not the land or any resources in or below the land. A land grant contract shall be entered into between the land user and the land administration department of the people’s government at municipal or county level
These show that China has a modern constitution (enacted 1982), which was importantly revised in respect of property in 2007, that the land of China is owned by the community and that user rights are obtained by entering into a contract with the land administration department of the people’s government at municipal or county level. The contracts are for 40 to 70 years.
It would seem therefore that the right of access to land can only be obtained by paying the community – but I do not know how the consideration is assessed or paid. If it is, say, comparable, to the costs incurred in buying the freehold in Australia or paying rent to a landlord who holds the freehold title then, prima facia, land access is no cheaper in China than Australia. But the funds are flowing to the community and therefore mitigate local taxes. In short, the income needs of the citizens are less if the community truly owns the land – does not just sing about ‘our’ land and fight distant wars defending it.
But it is not just in legal matters that China is very different to western modes; the attitudes of governments are chalk and cheese – markedly as we relax lending requirements for personal loans and mortgages. An article about real estate prices in the Chinadaily, 19 September 2020, reports:
“NBS (National Bureau of Statistics) senior statistician Kong Peng said the real estate market continued its steady trend in August as the central government has reiterated that “house is for living in, not for speculation,” calling for the implementation of a long-term management mechanism for the real estate market, while not using the real estate sector as a short-term measure to stimulate the economy.” (My emphasis CC)
Interestingly a similar article published two days earlier in the Chinadaily, Asia edition, has slightly different statistics but similarly quotes Kong Penn
“Home prices have remained largely stable with marginal growth. Most of the local governments have been strictly following the central government’s directive that housing is for living in and not for speculation and taking timely steps to ensure that the long-term mechanisms are effective,”
Thus it appears that China has a very entrenched competitive advantage – their land has been resumed, none is now ‘privatised’, they are not supporting a ‘landlord’ system. Thus access to land is, most likely, less expensive and the ‘market’ more stable than in Australia.
Of course, the harmful effects of ever-increasing land price could be offset here by a nationally uniform, uncapped – State collected – Land Value Taxation. It is time for some of our erudite economists to look afresh at the teachings of the much-ignored economist/philosopher Henry George and seriously research the impacts of our system of land access on the nature of our society and our economic performance.
With a political class heavily into real estate investment – our politicians generally own two and bit houses – the possibilities of significant change are, sadly, zero.
This brings to mind the observation of a Chinese commentator that the differences between our two countries is that ‘in Australia you can change the governing party but not the system whereas we in China cannot change the governing party, but we can change the system’.
[The Conversation, 11 Sept] This article draws on both a new report from the NSW Productivity Commission (NSWPC) and from newly published research from UNSW’s City Futures Research Centre. The authors point to Australia’s housing system as having produced “triple crises of rising homelessness, growing queues for non-market, affordable housing and the pervasive affordability problems for middle- and lower-income households who depend on the private housing market”. They call-out ever-increasing house prices as having been a driver of wealth inequality, a problem linked to rising mortgage debt and potential economic and financial instability. And they note, Australia’s private housing debt is amongst the highest in the world.
Colin Evan Cook is a long-retired engineer, migrated from UK in 1981; a one-time commoner of Ashdown Forest, Sussex and a small-holder & guest house owner in Tasmania. His interests in retirement are Modern Monetary Theory and Practice and continuing study of land access, acquisition – enclosures and other suspect means – and taxation.
Comments
17 responses to “China’s wicked competitive advantage. A house is for living, not for speculation.”
Western capitalism will falter, possibly implode through society’s failure to collect the economic rent. Wages in Australia are not too low. Its the cost of housing, anchored as it is in the cost of the land and the amount working people must pay in taxation; that’s what strips out their capacity to have a bountiful life. If the economic rent was collected it would negate the need for all other forms of taxation.
Yes policy makers should rediscover Henry George, but it might already be too late! The asset boom now underway will run its course and misery will be our lot.
No Government, no Central Bank, nothing can safe us from the land crash when it finally comes.
We will then be on our own!
Interesting article, thank you.
But I have some reservations about the claim that in China, access to land is “less expensive” and “more stable” than in Australia. Perhaps this is literally true (i.e., the land itself has a stable price), but I often read about housing speculation in China, which suggests that the houses themselves (usually apartments) have unstable prices. And it’s this background of (likely rampang) speculation that has caused concerns in Beijing, calling for a housing policy that discourages “housing for speculation” and encourages ‘housing for living in”.
It’s not hard to see why speculation happens even in China. Land is scarce and has long-term value. On the other hand, Chinese people have abundant savings. So the income they save must be invested somewhere. Whether in banks that earn low interest, or in assets with appreciating value.
Apologies if I have misunderstood the article. I do support the sentiment that housing are for “living in”, not for “speculation”. And I would even agree that if houses were subject to annual payments to the government based on land value, it would dampen speculation (since any capital appreciation is shared with the government). So there is something to be said for a policy that taxes capital appreciation one way or the other.
Kien Choong, Yes there is certainly speculation with buildings in China. Speculation on land can only be possible if the government fails to keep the land valuation up to date and collect the annual economic rent, If this is 100% effective the land remains at almost zero value. Failure to keep valuations up to date is what has been allowed to happen in Canberra.
However even if this doesn’t happen there is still considerable benefits in Government owning the land. As I have observed in China for example, when it comes to planning new infrastructure the Government owns the land so the occupiers can be moved on!
New factories and so on, seem to be spaciously set out with plenty of space between buildings and between machinery inside the factory, Something you won’t find in Western Countries as land is so expensive.
As Colin Cook correctly points out agricultural land is owned by “Collectives”. Of course there has been massive reclaiming of farm land for new factories. This has to be negotiated with the “Collectives”. One example I saw at first hand resulted in the small peasant farmers being moved off their land. The factory owners then built a cluster of new homes in the corner of the reclaimed land, with small plots for the farmers and their families to grow vegetables etc. The peasant farmers were offered a job in the factory and a share in the company. There was a mortgage on their new home which they had to repay, Naturally the farmers had mixed feelings about these arrangements but I suspect they didn’t have any alternative but to accept!
Thank you for reading my comment and your reply. Thank you for telling me about your personal observations on land use reform in China. I would agree that how land is used has significant social value in addition to the private value to the occupant.
Thank you Peter. You imply that the community benefit of land use contracts is very much in line with Georgist ideas and that generally Government keeps/should ‘land valuation up to date and (does/should) collect the annual economic rent.’ Doubtless there are variations between different provinces but for the community to aim to collect the up-to-date rental value nationally must be a huge boost for community finances.
Your first hand experience experience of of a factory development adds to the point that who owns the land makes a great difference in how a community develops socially; at least take care of/compensate those that are disadvantaged by industrial progress.
In Australia we should be seriously reflecting on and researching the social and national economic outcomes of our present land access system.
Yes Colin I am a Georgist. Sounds incongruous as I am a farmer. I have argued against a land tax for a long time with people like Fred Harrison, but I can now see that unless we change, then with the next land crash that will follow this current land boom ( which still has some years to run) it will end in disaster for western democratic capitalism.
Thanks Peter – I understand your opposition to Land Tax but it seems that farmers generally are OK with renting the money to farm with from banks; ideally they should be renting/leasing the land from the community instead.
But how to transition? The prospects are poor, IMHO.
Colin,- As a farmer I once had opposition to a land tax but no longer. I now understand that as land is the biggest asset class, the future of capitalism depends on the economic rent being collected. We can discuss further, any one else to, as we are expected to keep comments to less than 100 words on P&I,
peter_wilderness@bigpond.com
My point is that access to land in China would seem to be always granted by the ‘community’, resulting in a community benefit one would hope, and whilst the article – for simplicity purposes – referenced only land for homes, it is equally applicable to land for industry, commerce, schools house etc etc. Thus living, working, schools, hospitals all have ‘lower-underheads’ if access to land is not privatised.
Thank you for reading my comment, and for replying. If the general point is that government ownership of land matters, I am sympathetic. It’s not unique to China. Singapore’s government owns most of the land, and in Malaysia (my birth country), a lot of land are on 99 year lease. But speculation still happens in Malaysia (and I am sure Singapore), even with land on 99 year lease.
Perhaps I will understand your point better after reading a few more future articles of yours.
I’m trying to get Australians to understand the importance of land and access to it and the silliness of accepting escalating land access costs as a ‘good thing’ without further consideration. By way of background, you may be interested in the article ‘1788 – The Biggest Enclosure of Them All’ on my blog at cooksourdough.blogspot.com.au
Thank you for helping us understand this important point.
I suspect an economist might say that the price of land access ought to reflect its opportunity cost, and it’s the divergence between the price of land and its opportunity cost that is “bad”. If opportunity cost rises (e.g., due to scarcity), then the price will (should) also rise. Arguably, speculation causes this divergence, and so rising price due to speculation is “bad”.
But you are absolutely right that rising land price is not, in itself, a reason for celebration. I am sure most economists would agree.
An economist may well pronounce as you surmise – and leave this old engineer baffled! But you touch an important point, How does land become scarce? The stuff is there and has been for generations.
Scarcity is generated by big developers holding land banks of ‘developable’ land – reportedly enough for a decade ahead, minimum. And, in due time, being kind enough to ‘release’ it in ‘stages’ to ‘meet demand’ – but really timed to sustain profit objectives; or simply to boost the opportunity cost!
You raise an interesting issue that is beyond my competence to evaluate. As I understand it, there is an opportunity cost to holding land banks. (At a minimum, it is the cost of selling the land and keeping the funds in a bank deposit.) So I imagine that a developer (if she is a “profit maximiser”) would be trying to optimise in some predictable way.
It’s beyond my competence to both: (1) describe how that optimisation works, and (2) evaluate whether that optimisation adversely affects the social value of maintaining the land bank. (The land bank likely has “social value” in that land could be released when demand for it is greatest; it’s some kind of “trade over time”.)
All very interesting, but beyond my competence! Perhaps one day I will find out.
I had similar thoughts when my daughter moved to Canada 5 years ago and her hourly wage working in tourism was around 40% lower than in Australia, yet daily living cost for food, clothing, etc were similar (as is the value of the dollar). Her standard of living was as good as in Australia, so I wondered how that could work – less income, same costs, but same living standard. It boiled down to one thing – the cost of having a roof over her head. Rent was half what she’d paid in Australia.A quick internet search reveals the ave. cost of a house in Australia is $810,000, compared to the ave. cost of a house in Canada of $480,000, or 40% less. So it appears our higher wages (making us less internationally competitive) are all absorbed in the over inflated cost of putting a roof over our heads. The lucky country – not.
If only it were that simple. In Canberra we have the same land system as in China, yet land and house prices rival or exceed those in any other Australian city, and the social housing stock is at its lowest. Could it be that the “socialist” ACT Government knows a thing or two about how to extract monopoly rents. I am sure the Chinese government is no different, but has slightly different priorities in its quest to keep its citizens happy.
Michael, the problem with Canberra, -wonderful concept in its origins, is the failure of the ACT government to regularly update and collect the economic rent. If the government had done that the value of land in Canberra would be zero,- the value would then be the value of the home and improvements on the land.
Then the banks would lend against the improvements and the capacity of the borrower to repay the loan,
Not such a large nest egg when you die or retire, but a much higher retained income during your working life to provide for your retirement or whatever! And a cheaper home for the next generation!