(Yicai Global) Feb. 25 -- The Chinese government has drafted a new regulation that aims to exclude communal areas from individual house price calculations, meaning homes will be valued based on their internal floor space in a move that has sparked heated discussion.
China's western municipality of Chongqing is the only place in the mainland that has issued local laws stipulating that houses must be priced based on a unit's indoor floor space. Hong Kong changed its home sales model to one based on internal floorage in 2013.
But now the housing ministry has published a draft of a new residential project code, which appeared on its website on Feb. 18.
"The draft just seeks public opinions on the project construction norms," said Zhang Dawei, chief analyst of Centaline Property. "There's still a long way to go for a formal one. Even if the draft becomes official, it's unclear where it will be a mandatory standard."
The calculation and interpretation of communal areas is in the hands of real estate developers, who benefit financially under the existing system. Many include public areas such as parking lots and corridors in the shared area with higher prices then passed on to buyers. Developers pocket the money paid for such areas, which was supposed to be used for property management fees and the residential maintenance fund.
Shared areas in residential properties generally account for between 15 percent and 25 percent of the total, and in some cases can increase to 30 percent or even 50 percent. This means a home specified as having 100 square meters in a contract actually has less than 70 sq. m.
Communal spaces include elevator shafts, pipeline wells, staircases, garbage shoots, transformer and equipment rooms, public halls, corridors and management rooms which serve the entire building.
The idea of shared areas originated from a sales model for homes under construction in Hong Kong in the 1950s. There are no standards for them so their overall management is disorderly and leads to higher prices for buyers with larger property management and heating fees as well, state-backed Xinhua News Agency reported last year.
Pricing houses based on the indoor floor area favors buyers and cuts developers' grey income. If the houses are priced in this way, will the developers neglect public facilities and even raise prices? Will house prices change? Will the value of residential assets already owned fall? These questions demand prompt attention.
Rich experience in foreign markets shows that the more rational choice for developers to survive and profit in the market economy is to build better houses according to market demand rather than blindly following the model that takes advantage of these communal areas, Xinhua reported.
Market expectations for house prices will change in the short-term, Zhang Hongwei, director of Tospur Consulting Research Center, told Yicai Global. The market expects that the unit price of homes will increase slightly if they are priced based on the indoor floor area under the condition that the total price remains unchanged, he added.
Actual house prices, however, are the same for the buyers whether the houses are priced based on the overall floor area or the indoor floor area, said Guo Yi, chief analyst at Heshuo Real Estate. For example, a 100-sqm home that is on sale for CNY4 million (USD596,000) costs CNY40,000 (USD5,960) per sq. m, while the unit price is CNY57,000 if it is priced based on the actual usable area of 70 sq. m.
If the new rule is implemented in the future, China should consider how to achieve a smooth and reasonable transition of the housing sales pricing system on the premise of ensuring the stability of the real estate market, Centaline's Zhang said. Hong Kong's experience indicates that the country should set a reasonable transition period, promote the new rule and clarify key concepts in laws and regulations to ensure fair and transparent market operations, he added.
Editor: William Clegg