Rio Liu World

The Dilemma in China’s Residential Real Estate Market

The housing market in China has been cooling under scrutiny from government regulations. But the underlying problems remain unsolved: the rigid demands of people have desperate needs to be fulfilled.

By: Rio Liu

The housing market in China has been cooling under scrutiny from government regulations. But the underlying problems remain unsolved: the rigid demands of people have desperate needs to be fulfilled.

Working as a real estate broker in Shanghai last summer, I had first hand experience with the light drop in prices in the Chinese residential real estate market in its largest city. No one came to the shop. Customers were hesitant when we called them. When I visited owners who wanted to sell their houses and apartments, they were all eager to provide discounted prices, albeit to non-existent buyers. This drop in activity has been ongoing since the the beginning of 2018 with prices finally dropping due to the increased supply after the Chinese government enacted constricting regulations to deal with price bubbles in the housing market. These bubbles have finally come to the public’s attention in light of continuously rising housing prices over the past two decades which have prevented the general public from actively affording residential real estate. Although the irrational increase in prices has been tamed for the time being, the problem has yet to be fully  resolved. The current supply of housing, which  hasn’t yet met the demand of many customers, may lead to another round of bubbling. Moreover, the government has a conflict of interest in controlling the current housing price while maintaining an active housing market to benefit the economic growth of the country. Let’s go through this dilemma.

First, here is an overview of government policies. The Chinese government promotes the slogan, “houses for living, not for flipping”, a vivid description of the purpose of a series of governmental policies aimed at promoting money flowing into houses for full-time living. China has a unique household system that associates a citizen with the political districts, usually a city or a county, where he or she was born in. One will have social security, national health insurance, and other social welfares bonded to the local government. People who live in their own city are called a household population. However, many people migrate to big cities and, therefore, become the non-household population of the cities they migrated to. Only in rare cases can one change their household status from one place to another.

The term commercial house is used for properties who have the purpose of full-time living. They enjoy lower transactional taxes, and cheaper water, electric, and natural gas services. Since 2011, the Chinese government has begun restricting commercial house purchases in urban areas. By allowing the household population to purchase only two commercial houses and the qualified non-household population to purchase one commercial house in all major cities, the government has successfully curbed house purchases in urban areas. In Shanghai,for example, a non-household citizen has to pay social insurance for five years consecutively within the city in order to be qualified to purchase one commercial house. As a result, many unqualified non-household population members turn to “commercial properties”, apartments built on business lands. Owners of commercial property apartments have to pay for higher transactional fees and expensive services.

On the supply side, the government also restricted real estate companies from purchasing lands through various policies. For example, in Shanghai, real estate developers do not bid for lands with cash solely, but also have to compete based on a comprehensive evaluation score given by the government. The finance, technology, and experience factors of a developer are evaluated with weightages of  30%, 20%, and 50% respectively..Under policies such as these, even big real estate developers are having challenges purchasing land, let alone the small ones.

These regulations notwithstanding, the most serious problem is that rigid consumer demand has not disappeared. A majority of my prospective clients were owners who wanted to sell their only houses to buy new ones. One of the main drivers of this market sentiment was the need for better public education. In China, most of the good primary, middle, and high schools are public schools that enroll new students based on their household locations. Therefore, parents have to buy a house near the perspective schools for their children to be enrolled. Besides that, many demands come from young couples who want to have a bigger house for their future children and middle-aged families who would like to have their elderly parents come live with them. These so called “replacement customers” have become a major force and do not seem to be fading anytime soon.

Another driver of this untapped demand is China’s transient population. These members migrate from the countryside or smaller cities and need houses to live in. The tradition of buying houses is still deep-rooted within Chinese culture, mainly because of a tradition that a couple must a new house  to get married. The transient population already has a big market share in Beijing, Shanghai, Guangzhou, and Shenzhen, the four largest urban areas,where the percentages of non-household population ownership are 37.2%, 40.51%, 38.01%, and 67.7%, respectively.  But as previously mentioned, non-household customers are highly restricted from buying commercial houses in such cities. But they will rejoin the market as soon as there is an opportunity.

While regulating the residential real estate industry, the government still expects the industry to contribute to GDP growth. The overall real estate industry accounted for 6.5% of the GDP growth in China in 2016. Additionally, if we broaden the definition of the real estate industry to include the construction industry as well, its direct contribution to GDP growth is 13%, and its indirect influence is 36% using the 2016 estimates.  Thus, the Chinese government faces a dilemma in which they must concurrently prevent a pricing bubble while still  maintaining an energetic market to fuel economic growth and  promote a sufficient living condition for its citizens.

To work around the intersecting conflicts, the Chinese government has invested $60 billion in indemnificatory apartments to support people with limited financial conditions since 2010.  These government-funded, lower-price and limited-ownership apartments have made good strides in meeting the rigid demand for housing but the amount of apartments is still limited and people have to prove their financial difficulties to apply, while accepting no guarantees for receipt. Also, because half of the ownership belongs to the government, these apartments are prohibited from being resold. Lastly, the Chinese government has issued policies promoting the construction of long-term rental apartments and encouraging people to rent houses instead of buying.

With all that being said, the Chinese government has to be very careful in crafting policies affecting the real estate industry to  minimize the risk of price bubbles while satisfying consumer demand and  economic growth in the country with the world’s largest population. It is difficult to balance  these conflicting quests and there is definitely more to be done by the government.

Works Cited:

Analysis On The Real Estate.(2018, August 2). What will be brought by tests on rental apartments for collective construction? Will it affect the real estate market?. Retrieved from http://news.fang.com/open/29153389.html

Yicai. (2017, November 28). Analysis on transient population in first-tier cities: Shanghai has the largest number, Shenzhen has the highest share. Retrieved from https://www.jiemian.com/article/1777626.html?_t=t

China Index Academy. (2018, March 5). Being Harder in Buying Lands, Is Shanghai House Market Worth Investing?. Retrieved from http://www.sohu.com/a/224851610_415900

Shanghai Observer. (2018, July 2). Shanghai Plans to Initiate Projects for 42 Thousands City-Owned Indemnificatory Houses; Has Initiated for 24 Thousands. Retrieved from https://www.jfdaily.com/news/detail?id=94772

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