Evaluating Conditions in Major Chinese Housing Market1

Pei Kuang

Uni Frankfurt and Uni Mannheim

July 2012

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

Kuang (2012) July 1st 1 / 30

Outline

Chinese Housing and Land System

Prices in the Beijing Land Market

Housing A¤ordability Metrics for Eight Major Chinese Markets

Interpretation and Conclusion Discusions

Kuang (2012) July 1st 2 / 30

Chinese Housing Reform I

1949-1978

No private ownership of property is permitted

State determined the national econ. plan & monopoly provider ofhousing

Housing is allocated by employers (Danwei: SOEs or Gov�t) toemployees

No mortgage market exists

Kuang (2012) July 1st 3 / 30

Chinese Housing Reform II

1979-1988

trial privatization (in several coastal cities & expanded to 100+ citiesand 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

Kuang (2012) July 1st 4 / 30

Chinese Housing Reform III

1988-1998

1988 Constitutional Amendment: legal foundation for development ofprivate sector housing

government retained ultimate ownership of urban lands

permitted individuals to purchase the right of use of that land forurban residential purposes for up to 70 years

a series of measures and policies to accelerate the development ofprivate housing markets

work units were required to gradually terminate the direct housingallocation system

Kuang (2012) July 1st 5 / 30

Chinese Housing Reform IV

1998-

the State Council issued the 23rd Decree

Work units were no longer allowed to develop new residential housingunits for their employees in any form

integrate any implicit housing bene�ts into employees�salary

households had to buy or rent in the private housing market

start of the modern private housing market in China.

Kuang (2012) July 1st 6 / 30

Kuang (2012) July 1st 7 / 30

Kuang (2012) July 1st 8 / 30

Public Housing Sector

low-income household: rent low cost units (�Lian Zu Fang�) orpurchase special a¤ordable units (�Jing Ji Shi Yong Fang�) at highlysubsidized prices from local governments

Moderate-income households can obtain subsidies to rent publicrental units (�Gong Gong Zu Lin Fang�) or to purchase pricecontrolled units (�Xian Jia Fang�)

very limited construction of public housing in recent years

changed in 2007 the State enacted a series of policies to acceleratethe development of public housing

Kuang (2012) July 1st 9 / 30

Kuang (2012) July 1st 10 / 30

Kuang (2012) July 1st 11 / 30

The Urban Land Supply System and Land Market

Governments lease land parcels to developers, developers then buildhousing 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 betransacted through public auction or bidding

Land auctions are an important revenue source for local government

Kuang (2012) July 1st 12 / 30

Kuang (2012) July 1st 13 / 30

Prices in the Beijing Land Market

Kuang (2012) July 1st 14 / 30

Kuang (2012) July 1st 15 / 30

Kuang (2012) July 1st 16 / 30

Kuang (2012) July 1st 17 / 30

Kuang (2012) July 1st 18 / 30

Housing A¤ordability Metrics for Eight Major Chinese Markets

Kuang (2012) July 1st 19 / 30

Kuang (2012) July 1st 20 / 30

Kuang (2012) July 1st 21 / 30

Kuang (2012) July 1st 22 / 30

Kuang (2012) July 1st 23 / 30

Kuang (2012) July 1st 24 / 30

Kuang (2012) July 1st 25 / 30

Kuang (2012) July 1st 26 / 30

Conclusions

Prices seems very risky

Very di¢ cult to explain fundamentally sharp rises in Price-to-Rentratio and Price-to-income ratios since 2008 in Beijing and many othercostal markets

Insu¢ cient supply in several housing markets

The impact on chinese economy

Direct impact (private housing investment accounts for 15.1% in 08and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% ofall steel and lumber)Systemic risk in the banking sector; higher equity but large price dropcan wipe out any amount of equityMoral hazard could be a real concern; less known about the capitalstructure of developers, especially the central SOEs.

Kuang (2012) July 1st 27 / 30

Conclusions

Prices seems very risky

Very di¢ cult to explain fundamentally sharp rises in Price-to-Rentratio and Price-to-income ratios since 2008 in Beijing and many othercostal markets

Insu¢ cient supply in several housing markets

The impact on chinese economy

Direct impact (private housing investment accounts for 15.1% in 08and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% ofall steel and lumber)Systemic risk in the banking sector; higher equity but large price dropcan wipe out any amount of equityMoral hazard could be a real concern; less known about the capitalstructure of developers, especially the central SOEs.

Kuang (2012) July 1st 27 / 30

Conclusions

Prices seems very risky

Very di¢ cult to explain fundamentally sharp rises in Price-to-Rentratio and Price-to-income ratios since 2008 in Beijing and many othercostal markets

Insu¢ cient supply in several housing markets

The impact on chinese economy

Direct impact (private housing investment accounts for 15.1% in 08and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% ofall steel and lumber)Systemic risk in the banking sector; higher equity but large price dropcan wipe out any amount of equityMoral hazard could be a real concern; less known about the capitalstructure of developers, especially the central SOEs.

Kuang (2012) July 1st 27 / 30

Conclusions

Prices seems very risky

Very di¢ cult to explain fundamentally sharp rises in Price-to-Rentratio and Price-to-income ratios since 2008 in Beijing and many othercostal markets

Insu¢ cient supply in several housing markets

The impact on chinese economy

Direct impact (private housing investment accounts for 15.1% in 08and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% ofall steel and lumber)Systemic risk in the banking sector; higher equity but large price dropcan wipe out any amount of equityMoral hazard could be a real concern; less known about the capitalstructure of developers, especially the central SOEs.

Kuang (2012) July 1st 27 / 30

Conclusions

Prices seems very risky

Very di¢ cult to explain fundamentally sharp rises in Price-to-Rentratio and Price-to-income ratios since 2008 in Beijing and many othercostal markets

Insu¢ cient supply in several housing markets

The impact on chinese economy

Direct impact (private housing investment accounts for 15.1% in 08and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% ofall steel and lumber)

Systemic risk in the banking sector; higher equity but large price dropcan wipe out any amount of equityMoral hazard could be a real concern; less known about the capitalstructure of developers, especially the central SOEs.

Kuang (2012) July 1st 27 / 30

Conclusions

Prices seems very risky

Very di¢ cult to explain fundamentally sharp rises in Price-to-Rentratio and Price-to-income ratios since 2008 in Beijing and many othercostal markets

Insu¢ cient supply in several housing markets

The impact on chinese economy

Direct impact (private housing investment accounts for 15.1% in 08and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% ofall steel and lumber)Systemic risk in the banking sector; higher equity but large price dropcan wipe out any amount of equity

Moral hazard could be a real concern; less known about the capitalstructure of developers, especially the central SOEs.

Kuang (2012) July 1st 27 / 30

Conclusions

Prices seems very risky

Very di¢ cult to explain fundamentally sharp rises in Price-to-Rentratio and Price-to-income ratios since 2008 in Beijing and many othercostal markets

Insu¢ cient supply in several housing markets

The impact on chinese economy

Direct impact (private housing investment accounts for 15.1% in 08and 13.2% in 09; 5.7% of GDP; 14.3% of all workers; consume 40% ofall steel and lumber)Systemic risk in the banking sector; higher equity but large price dropcan wipe out any amount of equityMoral hazard could be a real concern; less known about the capitalstructure of developers, especially the central SOEs.

Kuang (2012) July 1st 27 / 30

German Housing Prices and Positive Factors for PriceIncreases

Real price stagnation since 1970s (short-lived boom afterreuni�cation)

Overall price " 2.5% (2010) & 5.5% (2011, twice of in�ation);apartment price " 10%+ in e.g., Berlin and Munich

Positive factors for HP:

rising in�ationary pressure

construction has been lagged (e.g., Berlin)

Kuang (2012) July 1st 28 / 30

Negative factors for price appreciation

long term: demographic factors, population forecast 82million (now)# 79million (2025) & 70million (2050)

conservative German banking rules (normally require 20% orsubstantial collateral, proof of good earnings)

rents are tightly controled

the quality of �ats for rent is high and tenants are well protectedagainst rent increases and evictions

investors�expectations run counter to a bubble

Kuang (2012) July 1st 29 / 30

BackKuang (2012) July 1st 30 / 30