China’s Policy Adjustments to Promote an Affordable and Stable Housing Market

Abstract

This article examines China’s growth in home prices in order to assess whether the authorities have been able to achieve an affordable and stable housing market. It considers whether the home price declines which have occurred in some regions could trigger a financial crisis and assesses the changing real estate market, reviews policies that have been implemented, identifies potential risk factors, and considers policies based on the experiences of other countries with housing booms and busts.

Keywords:

• China
• house prices
• government policy
• affordability

Notes

http://online.wsj.com/article/SB10001424052702304906004576367121835831168.html.

In China, ownership of residential properties is limited to a term of 70 years. Under current law, after this period expires, the right to use the land and property will no longer belong to the current owner. Effectively, therefore, the owners are users of the property who lease the land for 70 years. There is some ambiguity about the law in this regard and its implication for property taxes, which have been the focus of some debate in recent years.

Man (2011) points out that “affordable housing in China, commonly known as ‘economical and comfortable housing,’ is designed to be available to middle-to-low-income households, including public-sector employees, to encourage home ownership.” Economically affordable houses are constructed according to China’s central planning system. Municipal governments are in charge of construction of these units. Real estate developers or employers who provide housing benefits are usually investors. These residential properties are sold to low- and medium-income urban households with merely a modest profit margin, and thus considered a social welfare benefit. In contrast, the construction and transaction of commodity houses are determined by market forces.

It should be noted that economically affordable homes are in high demand, but the supply is not so readily forthcoming, given that other types of homes can be sold for much higher prices.

Hukou is a household registration system used in China. A hukou record officially identifies a person as a resident of an area and includes information such as name, parents, spouse, and date of birth. Social welfare benefits are usually tied to a person’s hukou.

There have been rising concerns that such administrative measures may lead to distortion of prices in the housing market. See, for example, http://news.xinhuanet.com/house/2011-08/23/c_121896437.htm.

The “homeownership” rate published by the Ministry of Construction and Chinese National Bureau of Statistics is defined as the percentage of residential properties that is privately owned. In the United States and many other countries, the homeownership rate is defined as the share of households that own their homes.

Available at http://finance.ifeng.com/roll/20110922/4646923.shtml. Last accessed 9/27/12.

China’s Housing Provident Funds are said to be modeled on Singapore’s example. However, in the Singapore model, individuals borrow from their retirement funds to make a down payment, which must be repaid before retirement. This is not the case for HPF.

China Construction Bank issued the first residential mortgage-backed securities in 2005 as part of a securitization pilot program approved by the People’s Bank of China. The size of the issuance was three billion yuan.

http://dealbook.nytimes.com/2010/01/27/schillers-list-how-to-diagnose-the-next-bubble/.

Rental prices are measured in RMB per sqm (construction area) per month.

It should be noted that Leung (2010) raises concerns about the officially provided nationwide house price series in China. Sharing these concerns, Burdekin and Tao (2014) confirm their empirical findings using an alternative house price series. The major weakness of this series for our purposes is that it is only available from January 2007 onward. In future work, it would be useful to pursue the use of this alternative series as well as consider other housing markets, such as Shanghai, as the authors just cited.

Standard & Poor’s recently warned about increasing liquidity pressure for Chinese real estate developers in the next 6 to 12 months. See http://online.wsj.com/article/SB10001424052970204831304576595712512609964.html.

http://news.163.com/07/0831/09/3N7CBP8A00011SM9.html.