China’s Real Estate Market

The real estate market in China has undergone a complete shift. At one point in time, the Chinese workers were assured of secure housing by their communist government. However, the recent trend in Chinese real estate has made real estate unaffordable even for the highly paid middle class employees making it a completely different ball game.

The situation has therefore completely changed from socialism to capitalism. This drastic change in the Chinese real estate market has been documented in this article.

Communism

The Chinese real estate market forms a fascinating tale of the rise of hardcore capitalism in a communist country. In the beginning, i.e. in 1978, Chinese real estate had no price. This was because all the land in the state of China was owned by the government. The Chinese constitution prohibited private ownership and transfer of land.

As such, there could not be any buy or sell transactions. All the employees were also working for the government. Therefore they would be provided housing on the basis of their seniority, number of years of service and size of their family amidst other factors. At this juncture, it would have been impossible to predict that one day China would become one of the biggest real estate markets in the world and would one day be a major example used in debates pertaining to real estate bubbles.

Privatization Takes Over

Things began to slowly change in the socialist economy of China. The economy no longer remained socialist in 1988 when the constitution was amended. Laws which did not allow for private ownership of land were now amended.

The latest laws divided land into two categories:

  1. One category was reserved for the people of the lower income households. These houses were to be sold on a cost plus basis. Also, the government would keep a strict check on the costs incurred in building these houses. Developers who created and executed these projects without any hiccups would get tax credits for the same. Ideally these houses were sold at 5% above the cost price to the low income families.

    However, there were restrictive conditions which made it difficult to qualify for such a home. Also, exit from such a home was not easy as the government prohibited selling off these homes for a period of at least 5 years after its purchase.

  2. The other types of houses being sold were commodity housing. This was the category of the real estate market that was driven by the markets i.e. investors could freely buy and sell their properties at whatever prices they saw fit. In the meanwhile, they could also rent out these properties. The rent control act of 1994 completed the transformation of a part of Chinese real estate market from socialistic to capitalistic.

Property Boom

The next couple of decades saw one of the biggest property booms that the world has ever witnessed. The size of the government controlled affordable homes in the economy has been steadily shrinking. Over time, they have been replaced with commodity housing. Even though the supply of commodity houses has greatly increased across Chinese cities, so have their prices.

The average price rise for over two decades has been in double digits every year. This means that the prices of houses have increased by a minimum of eightfold during this twenty year period. In many cities, the averages have been as high as 26% compounded annual growth rate for around two decades! This can be considered to be one of the biggest and longest lasting bull runs in any real estate market across the world. The rapidly rising prices made real estate go out of the reach of working class population. This prompted the Chinese government to once again enact stricter laws.

Strict Laws on Second and Third Home

The Chinese government has enacted strict laws to curb the purchase of second and third homes in most Chinese cities. These laws were enacted to ensure that poor first home borrowers were not facing competition from wealthy second or third home borrowers.

The laws entail that people buying their second home must make a down payment of at least 60% of their property value. Similarly, if the person is buying a third home, they would be provided no financing and would be required to pay the entire amount in cash.

This law had serious repercussions on the housing sales in tier-1 and tier-2 cities. The rapidly rising house prices quickly saw a correction. China thus saw its first real estate bust during this period!

Stimulus Package

In 2008, the Chinese government provided a stimulus package to revive its banking sector and encourage lending. However, this ended up once again increasing the real estate prices which the government had taken so long to subdue. The banks were flush with cash and real estate developers seemed keen on borrowing and as such a lot of money was lent to them at a frantic pace. For a short while, the bust quickly turned into a boom. However, this boom was extremely short lived.

Misallocation

The Chinese developers built huge gated communities and townships. Most of these were built for the higher class people since there is minimum government regulation in that price range. However, the elite class has not purchased these houses. As a result, China now has entire towns and cities which are ready for inhabitation. However, they have not been inhabited. They are commonly referred to as ghost cities by many economists and represent one of the largest misallocation of funds in the history of the centrally managed Chinese economy.

At the present moment, some cities in China are witnessing a downfall in their property prices whereas the prices have stagnated in some other cities. If the market sentiment is to be believed China is about to witness a serious correction of real estate prices.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Real Estate