Evaluating Conditions in Major Chinese Housing Market1

Pei Kuang
Uni Frankfurt and Uni Mannheim

July 2012

1 Contents based on Wu, Gyourko, & Deng (2010) "Evaluating Conditions in Major Chinese Housing Markets", NBER Working Paper No. 16189
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Outline

Chinese Housing and Land System Prices in the Beijing Land Market Housing Aordability Metrics for Eight Major Chinese Markets Interpretation and Conclusion Discusions

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Chinese Housing Reform I

1949-1978 No private ownership of property is permitted State determined the national econ. plan & monopoly provider of housing Housing is allocated by employers (Danwei: SOEs or Gov to t) employees No mortgage market exists

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Chinese Housing Reform II

1979-1988 trial privatization (in several coastal cities & expanded to 100+ cities and then the entire country) emergence of a private housing market rst private housing developer was founded in Shenzhen in 1980 mainly targeted foreigners or employees of non-state-owned enterprises limited in scope and grew slowly

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Chinese Housing Reform III

1988-1998 1988 Constitutional Amendment: legal foundation for development of private sector housing government retained ultimate ownership of urban lands permitted individuals to purchase the right of use of that land for urban residential purposes for up to 70 years a series of measures and policies to accelerate the development of private housing markets work units were required to gradually terminate the direct housing allocation system

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Chinese Housing Reform IV

1998the State Council issued the 23rd Decree Work units were no longer allowed to develop new residential housing units for their employees in any form integrate any implicit housing benets into employeessalary households had to buy or rent in the private housing market start of the modern private housing market in China.

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Public Housing Sector

low-income household: rent low cost units (Lian Zu Fang) or purchase special aordable units (Jing Ji Shi Yong Fang) at highly subsidized prices from local governments Moderate-income households can obtain subsidies to rent public rental units (Gong Gong Zu Lin Fang) or to purchase price controlled units (Xian Jia Fang) very limited construction of public housing in recent years changed in 2007 the State enacted a series of policies to accelerate the development of public housing

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The Urban Land Supply System and Land Market

Governments lease land parcels to developers, developers then build housing units The rst land auction was held in Shenzhen in 1987 Most land parcels were not sold publicly via auctions or biddings -> below market prices (criticized) In 2004 the State required that all urban land could only be transacted through public auction or bidding Land auctions are an important revenue source for local government

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Prices in the Beijing Land Market

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Housing Aordability Metrics for Eight Major Chinese Markets

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Conclusions
Prices seems very risky

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Conclusions
Prices seems very risky Very di cult to explain fundamentally sharp rises in Price-to-Rent ratio and Price-to-income ratios since 2008 in Beijing and many other costal markets

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Conclusions
Prices seems very risky Very di cult to explain fundamentally sharp rises in Price-to-Rent ratio and Price-to-income ratios since 2008 in Beijing and many other costal markets Insu cient supply in several housing markets

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Conclusions
Prices seems very risky Very di cult to explain fundamentally sharp rises in Price-to-Rent ratio and Price-to-income ratios since 2008 in Beijing and many other costal markets Insu cient supply in several housing markets The impact on chinese economy

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Conclusions
Prices seems very risky Very di cult to explain fundamentally sharp rises in Price-to-Rent ratio and Price-to-income ratios since 2008 in Beijing and many other costal markets Insu cient supply in several housing markets The impact on chinese economy
Direct impact (private housing investment accounts for 15.1% in 08 and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% of all steel and lumber)

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Conclusions
Prices seems very risky Very di cult to explain fundamentally sharp rises in Price-to-Rent ratio and Price-to-income ratios since 2008 in Beijing and many other costal markets Insu cient supply in several housing markets The impact on chinese economy
Direct impact (private housing investment accounts for 15.1% in 08 and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% of all steel and lumber) Systemic risk in the banking sector; higher equity but large price drop can wipe out any amount of equity

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Conclusions
Prices seems very risky Very di cult to explain fundamentally sharp rises in Price-to-Rent ratio and Price-to-income ratios since 2008 in Beijing and many other costal markets Insu cient supply in several housing markets The impact on chinese economy
Direct impact (private housing investment accounts for 15.1% in 08 and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% of all steel and lumber) Systemic risk in the banking sector; higher equity but large price drop can wipe out any amount of equity Moral hazard could be a real concern; less known about the capital structure of developers, especially the central SOEs.

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German Housing Prices and Positive Factors for Price Increases

Real price stagnation since 1970s (short-lived boom after reunication) Overall price " 2.5% (2010) & 5.5% (2011, twice of ination); apartment price " 10%+ in e.g., Berlin and Munich Positive factors for HP:
rising inationary pressure construction has been lagged (e.g., Berlin)

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Negative factors for price appreciation

long term: demographic factors, population forecast 82million (now) # 79million (2025) & 70million (2050) conservative German banking rules (normally require 20% or substantial collateral, proof of good earnings) rents are tightly controled the quality of ats for rent is high and tenants are well protected against rent increases and evictions investorsexpectations run counter to a bubble

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