China’s Housing Market: It’s More Than Just a Bubble

By Tina Kim
Editor

Often hailed as the economic spotlight of the world, China has enjoyed its robust growth in manufacturing, waves of foreign investments, and increasing economic power. In recent months the media have been covering stories indicating a looming housing bubble threatening to stagnate the growth of China’s economy. Reports have highlighted China’s high housing prices, millions of vacant apartments, and tax measures from the government to contain the housing bubble. One of the most striking examples has been “ghost cities,” entire developments of luxury apartments and high-end shopping malls completely empty of residents. Meanwhile, housing prices have supposedly skyrocketed while real estate development has stalled—allowing construction, steel and cement production, and furniture and interior manufacturing to come to a halt. Will China’s rapid urbanization and growth finally come to an end?

UCLA Professor of Urban Planning Paavo Monkkonen says a housing bubble is not the right way to frame China’s current housing market. Although high housing prices may be the case for large cities such as Shanghai or Beijing, there are lower prices in areas where there is not as much economic activity. Similar to the U.S. and elsewhere, the high prices are relative to the location: the closer to the hub of the city, the more expensive, and the farther away, the cheaper. Rather than high housing prices, limited investment opportunities and income inequality are greater explanations for unaffordable housing.

China is generally a “savings” oriented nation and has one of the highest savings rates in the world. According to Forbes, this fact may reflect the cultural preference for sons; “about half of the increase in the savings rate of the last 25 years can be attributed to the rise in the sex ratio imbalance.” One hundred and twenty-two boys are born for every 100 girls today, which means one of five Chinese men will not marry. As a result, men have tried to become more “competitive” bachelors by increasing their savings and owning an apartment.

However, there is constant insecurity from the cost of health care, education, and age-old pensions that may change in the future despite these savings. The natural reaction would be to invest one’s earnings. But for an individual in China’s middle and working class, there are very limited options. The government sets interest rates for banks, which yield very little return. As a result, individuals have turned to buying second or third apartments in order to secure their future. However, as more people began investing in real estate, prices have risen. In response, the Chinese government issued a 20% capital gains tax on sales of second homes in Shanghai (and later throughout the country) to discourage real estate investment and dampen fears of a housing bubble.

Interestingly, many couples have gone as far as divorcing to circumvent the tax. While remaining divorced on paper, couples would live as a married couple to buy a second home. But this does not fully explain why individuals would invest in developments of ghost cities, where there are no tenants or returns on investment, or pay for infrastructure like a new subway or terminal, where there are no people.

Monkkonen, who has taught at the University of Hong Kong, explains that ten years ago, this same phenomenon occurred. Local Chinese governments in the past built massive terminals, roads, high-speed railways and other infrastructure at the edges of cities. For a few years, these areas would remain empty, but ten years later, people would eventually occupy to a point where the government needed to build more.

People from rural areas moving to cities have primarily fueled this expansion. At the end of 2011, 691 million people were living in urban areas and about 657 million were still left in the rural areas. With a large supply of rural migrants, the expanding infrastructure and ghost cities are literally developments years ahead of their time, waiting for these people to fill the streets and sustain economic growth. However, at some point, China will run out of rural migrants moving to cities.

“So far everything has been about growth,” Monkkonen explains. “But eventually the expansion is going to stop and the whole way that cities get money is going to disappear or get very limited. They have to learn new ways to get money or else there’s going to be a huge disaster.”

The new property taxes, therefore, may be a transition for local governments to obtain new sources of revenue other than through expanding cities. Moreover, a new wave of tax reforms may also indicate a greater and ubiquitous problem in China’s economy: income inequality.

The gap between rural farmers and the rural elite has contributed greatly to this income gap. According to the New York Times, half of China’s 1.3 billion people live on incomes “less than a third of those in cities,” but “many outside analysts say [income inequality] has actually gotten worse, making China among the world’s most unequal societies.” New tax reforms and taxes are thus attempting to bring greater access to social programs to the poor and elderly. China’s new rural pension has added over 240 million people since 2009 and in 2011 over 55% of adults had pensions. However, China’s funding for pensions and the overall welfare system has been drastically underfunded. In some rural areas, pensions are as low as 55 yuan (about $8.75) per month.

“Welfare spending has been inadequate, amounting to about half the level of comparable middle-income countries,” as stated in the Wall Street Journal. In addition, there are more than 200 million migrant workers in cities who are systematically blocked from obtaining social services and jobs (despite cities’ high dependence on rural migration). This system, called Hukou, continues to divide income levels between the rural and urban people. Moreover, as rural migration continues and urban populations expand, the issue of affordable housing has become an increasing problem.

In Beijing, 2 million people of its 20 million population live in apartment-style bomb shelters underground. These are informal markets, with landlords and advertisement in websites for people attempting to find affordable housing in the city. The 2 million individuals are drivers, waiters, students (estimated at 30%), and people of lower income. A new policy in Beijing has ordered the eventual eviction of these residents, sometimes referred to as the “rat population,” according to Professor of Urban Planning at MIT Annette Kim’s research in Beijing.

China has taken measures to address income inequality; however, social programs have been significantly underfunded and the rural migrants in cities have been marginalized from social programs and services. Moreover, a more fundamental method to address inequality would be to invest and improve the livelihood of the younger generation. Due to China’s one-child policy, there is a greater burden for only children to someday financially support and look after their elderly parents. According to Brookings, “In 2010, there were 116 million people aged 20 to 24 and by 2020, the number will fall by 20% to 94 million;” however, the number of the elderly, which is already greater than the youth population, is projected to increase to 240 million by 2020.

Greater access to affordable housing, more investment opportunities, and social programs for lower income and the elderly must occur to secure China’s future middle and working classes and maintain China’s growth. Sensational policies such as building glamorous infrastructure, tackling corruption scandals, and containing the “housing bubble” may be helpful to a degree. However, for China—and any other country for that matter—its future economic power lies within the productivity of the younger generation, not in its buildings. China’s youth is the country’s greatest asset and will be the country’s greatest impediment if its government fails to recognize them its most sustainable investment.

Facts and figures from Forbes, Wall Street Journal, New York Times, The Economist, Bloomberg, CBS News, a personal interview with UCLA Professor of Urban Planning Paavo Monkkonen, and a guest lecture by MIT Professor of Urban Planning Annette Kim.