“Owning” a Real Estate Property in China

To most Americans, owing a real estate property means paying the brokers to buy, dealing with the title companies, and paying the real estate taxes, what they don’t realize, is that all the above are activities that allows complete ownership of the property, which is protected by the Constitution. Owning a home has always been the American dream, immigrants like me, are fool-hardy proof of that.

Many of my American friends have asked me what it is like to own a real estate property in China, since I have bought and sold numerous ones there. My answer is always, do NOT buy a real estate property in China unless you know what you are getting into, and what everyone knows  – buy low and sell high.

Even though the Chinese government sped up their process of privatization over the past 10 years, the most valuable property – the land is owned by the government. They say it belongs to the people, but in reality, the people cannot determine what they can do with the land; the government does.

This creates in interesting question, if the land belongs to the government, how do you “own” a house in China? The answer is, you don’t. Let me explain through the entire process.

When you buy a house or a piece of real estate property in China, the first thing to do, is to check whether the seller or the developer has the proper government authorization. The authorization consists of 3 parts,
1. The government allows the developer to develop residential or commercial properties in a certain piece of land
2. The use of the land is limited to 70 (sometimes 30, 40, 50 depending on the case) years
3. Once the time is up, the government can take the land back
If the authorization is complete, you can then go ahead sign a pre-formatted contract and pay the seller or developer and start the transfer of ownership process. You can do this yourself or hire an agent. However, be warned, an agent in China is just an agent, you still take full responsibility of any error or problem the agent creates.

The money you have paid actually consists of 2 parts,
1. The money to buy the land which your property is built on, if it’s a multi-level building, you pay your share by size
2. The actual property itself
Why the distinction? Because once the transfer of ownership is complete, you will receive 3 certificates:
1. Certificate of land, which states that you are allowed to use which piece of land, and if it’s a multi-level building, shared by how many others
2. Certificate of building, which states that you own the property
3. Certificate of title, which basically combines the two above and says you are the owner of the property

Interesting, hah? You may ask, if you don’t own the land, what happens after the term ends? Well, at this time, nobody knows! BUT, the big but, is that the government has the right to take the land back without paying you a single dime once the term is up. And since your property is attached to the land, it then will belong to the government as well.

Then you may ask, why are people in China still buying? Are they stupid? The answer is no. As far as I can see, Chinese people always want to own their house rather than renting. This is probably in the blood. It’s also sort of the Chinese Dream, owing your own home. With the billions and billions of people in China, there are plenty have to buy. In addition, there are people like me, who see real estate properties as an investment vehicle since it’s probably the fastest way to grow net worth. Buy-to-rent is not a real option in China since rent is never enough to cover the expenses to buy a house. Like my properties, I bought them mainly for appreciation and plan to sell them at a certain point, and in the process renting them out just to make some small changes.

With the real estate price going up so rapidly in China in the past few years, more and more investors are finding themselves buying up properties. This has created a self-fulfilling prophecy and real estate price has been in an upward spin for years all around China. The price hike is a double-edged sword for the government. On one hand, the government can sell land at higher and higher prices to the developers and generate more income and spend more. On the other hand, the price has gone up so high that the majority of people cannot buy anymore. With the rapid growth of private business and government scandals, people have become more angry than ever. The government needs to control the real estate prices to calm the people down. Real Estate price control has been a major topic in the People’s Representative Conference which just finished two days ago. The government wants to control it at an affordable level while keeping the income level.

Again, the smart government officials and their scholars come up with another bright idea, let’s learn from the Americans and start collecting real estate taxes. And in a typical CCP style, it has already started in Shanghai and Chongqing as pilots, and eventually will start collecting the entire country in a few years. Shanghai and Chongqing have different rules and different financial targets for the new real estate tax.

In addition, the central government in Beijing also gave authorization to the local government to make up their own rules to restrict buying real estate properties. How? Each city is different. For example, in Shanghai, if your family is official Shanghainess then your family is allowed to buy two properties in total, once you finish your quota, you cannot buy anymore. If you are from a different part of China, your quota is only one. If you are a foreigner, you have to prove you need to live in Shanghai and have to buy a property before they allow you to buy. This is interesting, because I have friends who would go out and get fake divorce and thus create new opportunities to buy.

What happens next? Nobody knows! The biggest problem I see, is that the taxation of real estate property is against common law and common sense. Common sense tells us that any property tax should be charged to the owner of the property, not the renter. In addition, to investors like me, each year we pay taxes and put more money into the property, but when then term on the land expires, the value of the property goes to 0. So we are actually paying for the usage of the property for the term, be it 30, 40, 50 or 70 years. Isn’t that just renting? And the government is the biggest owner of all properties? Interesting, ha?

Today, when you look at the real estate prices in Shanghai, you would find the buyers are all too rich or crazy. For example, a good friend of mine bought an apartment in a high-rise building in Pudong district (the new district closest to the PVG airport), 90 square meters for 2.2 million RMB. 90 square meters is roughly 810 square feet and 2.2 million RMB is about 335K USD. This is slightly lower than the properties in California, but if you consider the fact that you can only use for 70 (or less) years and it’s an apartment, you would think he is crazy. How far and how long can this go? Again, nobody knows.

My goal is to sell all the investment properties this year while the market is still good. It feels like a relay race, whoever gets the next round will have to pay more, and the last person to the finishing point loses it all, and whoever get to the finishing point faster will be the biggest loser!