China’s Housing Crisis

By Peter Yuan Cai

Jan 19, 2010 – 6:13:13 AM

One of the hottest television dramas currently on air in China is called ‘Woju’, translated as snail home, alluding to the tremendous burden of carrying the dream of home ownership in China. The series has sparked a nationwide debate on the housing affordability issue. Newspaper editorials, online discussion forums and gossip around the tea time are all about with skyrocketing house prices and their impact on social stability, especially regarding the younger generations.

In a recent Green Book on housing development in China, published by the Chinese Academy of Social Sciences (CASS), many commentators argue that the housing affordability issue has reached a breaking point. The Chief Economist of the National Bureau of Statistics of China says:

‘House prices in Beijing are absolutely ridiculous. When a young couple purchases a house, parents and grandparents from both sides need to help out. The collective effort of four families is required to support a young family’s decision to buy a house. Three generations of savings are thus exhausted in buying a single house.’

Chinese banks are profiteering from this phenomenon by offering inter-generational mortgages to the home buyers. This is a frightening echo of a Japanese financial innovation during the heyday of the Japanese housing bubble, when three generations signed a collective mortgage.

According to the same Green Book, the current price of an apartment in China’s urban centres costs 8.3 times the average income of a household. This figure is significantly higher for China’s farmers: a roof over their heads would require roughly 29 times their annual household income. Researchers at CASS believe that this would make home ownership an implausible dream for 60 per cent of China’s urban residents and this figure could reach a stunning 85 per cent once they factor in the massive number of rural migrants who are moving into Chinese cities every year.

If the trend persists, there will be important ramifications for the process of urbanisation in China and maintaining the fabric of social stability. In addition to the current discriminatory and antiquated household registration system, inflated house prices act as another significant barrier that prevents rural migration into cities and condemns millions of migrant workers to marginalization and life at the periphery.

Young first home buyers, especially the generation born in 1980s, are particularly hard hit by the current housing crisis. They have missed out on the benefits of cheap housing once provided by the state-owned work units and they have to struggle in a very competitive housing market with skyrocketing prices. According to the head of Shanghai Pudong Development Bank’s home loan department, over 60 per cent of first home buyers depend on their parents for the substantial first installment

The undying love affair with home ownership amongst younger Chinese is clearly demonstrated in a recent China Youth Daily survey, which reveals that over 80 per cent of respondents believed that happiness is directly linked with home ownership. Some opinion editors are expressing the doomsday prophecy that soaring house prices are kidnapping an entire generation and that young people are losing their idealism for wanting of a roof over their heads.

The pressing questions that need to be addressed are what are the contributing factors to the looming housing crisis, and how can they be rectified?

One of China’s leading economists Zhou Tianyong wrote that the government’s monopoly over land supply is one of the principal culprits of the current housing woes. The land supply system in China is administered through a government approval process, in which land is acquired compulsorily and sold to developers in a competitive bidding process. The government deliberately limits the supply of land in urban areas to ensure food security and this has resulted in a supply shortage in many metropolitan areas. As the sole supplier of the market for land, the government is reaping the benefit of a monopoly at the expense of the home buyer, with income from the sale of land accounting for over 40 per cent of total government income. In a commissioned report by the All China Federation of Commerce and Industry, it was reported that the cost of land and associated taxes are responsible for 49.4 per cent of real estate development in China and government is the biggest beneficiary of the housing boom.

The lucrative land supply market is also a breeding ground for corruption and social discontent in China. Unscrupulous officials often collude with real estate developers to purchase land coercively from farmers at rock bottom prices and demolitions have been frequently carried out with brutal force.

To reduce the cost of housing development, the government monopoly over land supply must end. Individual and collective land owners should be able to offer their land on a competitive bidding market. This would not only ensure the diversification of land supplies but would also have the added advantage of closing a loophole in the murky area of compulsory land acquisition, which allows corrupt officials siphon off significant portion of the compensation money earmarked for land owners.

Peter Yuan Cai is a doctoral student Visitor to the ANU from Adelaide University and presently an EAF intern at the Brookings Center, Tsinghua University, Beijing.

http://www.eastasiaforum.org/2010/01/18/chinas-housing-crisis/