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Deciphering China’s Real Estate Market

By Liu Zhongliang Created: June 20, 2012 Last Updated: June 26, 2012
Related articles: China » Business & Economy
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This photo from the Jin Mao Tower in the financial district of Pudong shows a view of Shanghai real estate. A Chinese economist says prices are 'way too high' and that a big drop this year is possible. (Peter Parks/AFP/Getty Images)

This photo from the Jin Mao Tower in the financial district of Pudong shows a view of Shanghai real estate. A Chinese economist says prices are 'way too high' and that a big drop this year is possible. (Peter Parks/AFP/Getty Images)

China’s skyrocketing housing prices are due to the density of urban population centers and bad state policies.

China has seen a steady rise in housing prices since the 1998 property market reform. Some experts have argued that China’s high property prices are a product of its huge population and the need to maintain a large area of land for agriculture, thus restricting the amount of land available for real estate development. But this concept is incorrect. China only needs 1.07 billion acres out of its current total of 1.8 billion acres of agricultural land to be self-sufficient in food production. Furthermore, housing developments in cities use up relatively little land. 

Ineffective State Regulation

Chinese authorities have failed to implement regulations that would discourage speculation, and would help to maintain a supply of low-cost rental properties. 

Land Monopoly

Soaring housing prices also arise from China’s land ownership system, which gives regional governors a monopoly over land supply. The local governors restrict the supply of land available to the market, artificially creating a shortage that allows them to sell land at higher prices. The high land prices then drive up construction costs, and hence housing prices.

Monetary and Fiscal Policies

Large amounts of speculative foreign investments have flowed into China in expectation of an appreciation of its undervalued currency. These include investments in property, thus driving up property prices. 

Furthermore, in response to the 2008 global economic crisis, the Chinese regime launched a 4 trillion yuan stimulus package, which sparked a wave of speculative property development that further increased property prices.

Export and Foreign Exchange Policy

China’s excessive production capacity and favorable export policies have both driven exports, thus leading to an increase in the country’s monetary base and foreign exchange reserves. This large money supply has resulted in excess liquidity, and has driven inflation in China.

Restrictions on Private Enterprises

In China, private enterprises are obstructed in terms of capital investment and development by many restrictions; including restrictions on private businesses in sectors where state-owned enterprises have monopoly positions, restrictions on private financing, and various restrictions over capital investment and management of private companies. Furthermore, these companies are subject to unreasonable levels of taxes.

One-Child Policy

China’s one-child policy has created a situation where most Chinese parents are more than capable of financially supporting their only child. Now, newlywed couples are often capable of affording a new house with the financial support of both their parents. This further contributes to demand in the housing market.

Rich-Poor Gap

Bad state policies have led to other problems in Chinese society, which are also contributing to the high housing costs.

With the growing income gap between China’s rich and poor, the majority of China’s general population has adopted a lifestyle of low consumption. When this is further exacerbated by the lack of social security, people become more reluctant to spend. This results in a low domestic demand, with the exception of real estate, which contrasts with the Chinese economy’s excessive output. 

The rich have also begun to invest more in real estate instead of industrial investments and stocks and futures, which are now perceived as high-risk. A survey of China’s wealthy showed that over one-third now choose to invest primarily in real estate.

Corruption

With a total disregard for the welfare of their citizens, local officials have run cities as their private enterprises, turning large sums of illegitimate profits. They do so by quietly aiding housing projects that they have ties to, while secretly opposing all other housing developments that would compete against them. 

This limits the supply of new houses, driving up housing prices and allowing the officials to personally profit from their sales.

Other Reasons

Because of China’s high property prices, most Chinese cannot afford homes with more than three bedrooms. Developers have therefore turned to building smaller units, which they can sell more easily. However, building many small units increases the per-square-meter price of the property. It also increases the population density of the area and will further drive up housing prices in the future.

China’s housing prices are being driven upwards by rapid urbanization and speculation. Real estate speculators continue to buy and sell properties for easy profits, believing that they will always be able to find a buyer for every property. However, should the economy turn down, these inflated housing prices will become unsustainable.

China’s housing bubble will inevitably burst. Predictably, there will be two crashes, with the first likely occurring between 2013-2015, and the second around 2025, after which prices will never again recover to their previous levels. 

Many Chinese have bought real estate in a “house-for-pension scheme.” These investors are especially vulnerable.

Liu Zhongliang is a scholar in Hunan Province. He has written columns for NetEase, ifeng.com, SOHU.com, and bokerb.com. In an article published in 2011, Liu gave his analysis of the causes behind China’s high housing prices and a prediction of China’s future housing market. His article received 360,000 hits on NetEase and bokerb.com. 

Liu recently reposted the article to warn of the risks of investing in China’s housing market. The above translation is an abridged version of the article.

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