Chinese Housing Market: Trying to Figure it Out

Housing in China is a really hot market. Prices are skyrocketing. Yet there are some very curious trends. More farmland is being converted to tall apartment buildings, but when finished are hardly occupied. In fact at night there are few lights on, and few people live there. What is the point of all these empty apartment buildings? Meanwhile housing prices continue to rise, becoming more out of reach to the average Chinese family. Speculation abounds.

Inevitably this housing bubble will break. Those that have bought high and those speculators will lose their shirt. This cannot continue. If and when housing prices have gone down, current owners who bought high have protested and have even become violent. Prices in China must come down, and when they do it will be a momentous change for China.

The central and provincial governments have tried various strategies in order to reduce the skyrocketing housing prices, but most have had limited success. Beijing and other cities have tried:

  • price caps on new units

    In 2016, Beijing became the first Chinese city to cap prices on new flats, as mayor Cai Qi vowed “no home price rises in 2017 from the 2016 level.”

  • timeout limits for those that wish to sell: Xiamen is trying a 2 year period where a new owner cannot sell.

    …about 50 cities, including Qingdao, Changsha and Chongqing, have taken the same path, imposing a resell ban of two to five years.

    These resale restrictions sometimes coincided with price caps.

  • encourage commercial companies to offer rental units
  • limit the number of presale units: The government does not allow the builder to sell units until they are already completed. Builders were asking for up to 80% of the price up front. With this capital builders were buying more land and expanding, all without using their own capital. This now limits the builder to quick financing while he builds and slows down the available capital to expand. Coupled with restrictions of loans from local banks this can squeeze the ability of builders to expand.

    “Developers’ cash flow will be significantly affected as almost 80 to 90 per cent of cash sales come from project presales. Small developers will be squeezed out,” said Raymond Cheng, head of China Property Research at CGS-CIMB Securities.” With less cash from presales, developers will have to substantially cut their budgets for land and this could materially affect local government revenues.”

  • Forcing developers to completely finish units before they are marketed for sale. This eliminates the dominant source of capital for commercial builders.

    In June, Shenzhen offered its first land auction requiring developers to finish project construction before launching the sales push. The site was bought by China Jinmao Holdings, a State-owned developer, who outbid several competitors.

  • Require home buyers for an 80% down payment

Provincial and City Government
One of the unstated or maybe less stated goals of the City government is to continue to employ people and keep the unemployment rate down. A tried and true method from the past is to confiscate nearby farmland, expropriate whomever is there, and sell the farmland to the highest commercial bidder, who is usually building condos. The city may even finance the builder, who is local. The builder receives financing from his local bank, with the blessing of the provincial government. Building infrastructure projects employs a lot of people and keeps the economy going. This provides the city government with much needed income.

With more people employed there is more social stability and therefore less instability.

Chinese People
Marriage and a House
One of the prerequisites of getting a son married is a house. The prospective girl will ask for this as one of her demands. If the guy has no house then the girl will move on to someone who does. This is how China is. The guy’s family strives to buy a house for him, no matter the cost to them personally. This is a recent cultural request. In the past marriage requirements included fridges, stoves, washing machines and sewing machines. Welcome to the new China.

Real Estate as an Investment
Real estate has been one of the more stable economic investments where people can make money. Chinese people cannot invest outside of China. The Chinese stock market has been a boom and bust cycle. Currently we are in the biggest trough in 4 years. There was the P2P or person to person internet investing, but many people were cheated when site owners ran off with the money, so the government shut that down, or at least clamped down on it hard.

As Chinese housing increases in price year over year, more people have bought into the market, bloating it considerably.

Old Work Units have sold their Housing Units to Employees
In the past people have worked for state owned work units. These government subsidized work units had, in the past, sold housing to employees at a very low price. Now these housing units have appreciated greatly, making their owners very rich. Many people have bought multiples of these housing units.

Education and Housing location
In the past kids would have to sit an exam to get into a good quality primary or secondary school. Now this is not the case. Instead the government states that the kids go to one of the nearby schools. This has put pressure on real estate in districts with excellent schools. People are willing to spend a lot on housing for he right school location. This is called “xuequ fang” 学区房.

Getting a Hukou and Housing
Each person in China has a hukou, or residence card. This allows them to stay in a city and access social services for themselves and their kids. Outsiders that wish to get a hukou can do so if they buy a house. For migrant workers this drives them to want to find housing for their kids to attend better schools and for their parents who need to visit the better hospitals.

No Property Taxes on Housing
China has not yet set up property tax on housing, so both families and corporations that have multiples and empty units have no incentive to sell due to property tax.

2018 Nov 08 A Fifth of China’s Homes Are Empty. That’s 50 Million Apartments

2018 Nov 12 China property: if they tell you it’s a bear market, it’s bull: A contrarian view. He states that previously there was a 2.5 yr surplus of housing, but now down to 18mo. The economy is slowing, but if Beijing lowers interest rates this will accelerate appreciation of housing prices

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