China’s real estate market has expanded rapidly, powering the nation’s economic growth, with particularly strong demand in small and medium-sized cities.
Meanwhile, price restriction measures are necessary in large cities, where housing prices have exceeded annual incomes tenfold.
In recent years, regional governments have sold land acquired at minimal cost to government-affiliated real estate companies for low prices.
The real estate companies have earned huge profits by developing and building property, especially housing.
Real estate development investment has become a key driver of China’s rapid economic growth. It has consistently expanded at a faster pace than economic growth since private housing ownership was introduced in 1998.
While nominal GDP doubled between 2005 and 2010, real estate development investment tripled over the same period.
In 2011, real estate development investment was 6.17 trillion yuan, accounting for 13.1 percent of nominal GDP.
Housing is the mainstay of China’s real estate market. Land is owned by the government and cannot play a central role in real estate transactions.
Land is the main focus of real estate transactions in Japan because land can be privately owned, and a market has evolved in which land is bought and sold.
Offices and commercial facilities are also classified as real estate. In China, the market of such property is small compared with housing.
In 2011, investment in housing was worth 4.43 trillion yuan, accounting for 71.8 percent of the total real estate development investment.
The figure for commercial buildings was 737 billion yuan, 11.9 percent of the total, and that for office buildings was 254.4 billion yuan, just 4.1 percent of the total.
In the housing market, residential property demand is strong in many areas, particularly small and medium-sized cities.
Demand remains ahead of supply in small and medium-sized cities, which make up the overwhelming majority in China, because the area of new subdivision housing sold exceeds the area of new construction completions.
The strength of real demand in small and medium-sized cities is driven by the dynamism of urbanization and rising income levels.
Urbanization generates substantial new housing demand in cities. The urban population has risen dramatically because of migration from rural to urban areas.
Between 2006 and 2009, the populations of small and medium-sized cities increased by a total of 42.29 million.
Meanwhile, rising income levels have become a source of sustained replacement demand.
Income levels in inland China have consistently shown double-digit growth over the past 10 years.
People are steadily relocating from aging condominiums with poor facilities and living environments into better units in newly built condominium complexes.
An important issue is to curb real estate prices in major cities and resort areas, where the ratio of price to annual income remains high.
Housing prices in the major urban areas of Shanghai and Beijing and the resort areas of Hainan province have risen dramatically because of increased purchasing for investment purposes.
Because housing prices have risen faster than incomes, the average selling price for subdivision housing has climbed to more than 10 times the annual household income.
At this level, housing is no longer affordable for those planning to buy homes. It may be reasonable to conclude that a housing bubble is occurring in major cities.
This situation reflects high rates of return on housing investment.
With interest, a 1 million yuan deposit in 2004 was worth 1.12 million yuan in 2008. A condominium in Beijing purchased for 1 million yuan in 2004 could be sold for 1.3 million yuan in 2008.
Similar conditions existed in Japan before the collapse of the bubble.
In a public opinion survey on land conducted by the prime minister’s office in June 1988, 64.1 percent of respondents said land offered greater advantages than other assets, such as savings and stocks.
In the second half of the 1980s, Japan saw massive amounts of money flood into the real estate market, causing land prices to rise dramatically.
The Chinese government has implemented tighter monetary policies to restrain the rise in housing prices in large cities.
Interest rates were raised five times---in October and December of 2010, and in February, April and July of 2011. The deposit reserve ratio was increased twice in November 2010 and once every month between December 2010 and June 2011.
In addition to financial policies, a series of real estate price curbing measures was introduced.
In January 2011, the central government issued “New Eight Articles,” comprising eight real estate market regulation measures and called on local governments to set their own targets for the curbing of real estate prices.
Beijing and Shanghai announced restrictions on second-home buying and the purchasing of houses by persons who settled in the cities within five years. Similar measures were subsequently introduced in small and medium-sized cities.
Against the backdrop of the government’s price curbing policies, the sharp rise in housing prices has started to slow. However, housing prices in large cities and resort areas are still high in terms of ratios to annual incomes.
In Beijing, Shanghai and Hainan, there is still a need for price curbs to be implemented to stabilize real estate prices.
The ideal situation would be that income levels would continue to rise in the meantime, causing housing prices to come down in terms of ratios to annual incomes.
Once housing prices come down to a level about six times the average annual household income, then much of the dissatisfaction felt by the public with regard to housing will begin to ease.
It remains to be seen whether the Chinese government will be able to control the real estate bubble in large cities.
* * *
Shinichi Seki is an economist at the economics department of the Japan Research Institute.
This report was published in the June 2012 edition of Asia Monthly, an English-language publication of the institute, and was edited by The Asahi Shimbun. The original report is available at (http://www.jri.co.jp/MediaLibrary/file/english/periodical/asia/2012/06/contents.pdf).
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