The seemingly perennial surge in property prices has been the overarching theme for housing markets in the Greater China area since the 2007–2008 global financial crisis, with housing affordability in numerous cities now being stretched to unsustainable levels. However, these runaway headline figures mask the fact that substantial regional dispersion in house prices, such as urban-rural disparities, still persists. More recently, the deceleration of China’s economic growth, coupled with the unwinding of the Sino-US trade war, has cast great uncertainty into the outlook of housing markets within the region.
It is against this backdrop that this special issue is published by Economic and Political Studies (EPS) to discuss the housing market of the Greater China area. This special issue provides a splendid opportunity for readers to gain a comprehensive understanding of the state of the housing market in this area. It also offers Chinese authorities valuable insights to deal with the recent surge in housing prices. As an introduction to the special issue, the objectives are as follows. First, this editorial note aims to contextualise this collection by reviewing the reasons for the abnormal housing price movements in Greater China within recent years. Second, it introduces the main themes and arguments of the papers presented in this collection and summarises the main points of their contributions. In the concluding remarks, the implications of the contributions of this special issue are discussed for broader debate, and possible policy recommendations are provided.
Themes of papers in this special issue
The contributions to this special issue were selected from invited papers and an international call for papers through peer-blind reviews. This collection of papers focusses on the housing market of the Greater China area. The purpose behind the publication of this special issue is to contextualise recent research papers investigating the housing market of this area. Given the broader theme of the collection of papers presented in this special issue, we seek to examine measures that could be taken to address the housing price problem. Seven papers are included in this special issue.
‘What do we know about housing supply? The case of Hong Kong SAR’ by Charles Ka Yui Leung, Joe Cho Yiu Ng, and Edward Chi Ho Tang points out the relationship between the general economy and the housing market of Hong Kong, and argues that the housing supply plays a vital role in explaining the current situation. This case study also reveals that there are some practical challenges in understanding the housing supply of Hong Kong, including the complicated ownership structure of real estate development. The authors offer a unique perspective that the market of new housing units is not necessarily oligopolistic, even though most of the newly constructed housing units have been developed by large listed developers. While this may seem counterintuitive, considering housing policy from this perspective has promising implications on the housing market. All in all, this is a well-written paper that directly addresses the theme of the special issue.
My paper co-authored with Xiaoyang Li, titled ‘The development of Hong Kong housing market: past, present, and future’, offers a review of the past boom-bust cycles of Hong Kong’s housing market and addresses some important issues in the Hong Kong housing market. We take a narrative approach to summarise the lessons that we can take from the history. We argue that the imbalance between housing demand and supply, the interactions between the stock market, financial institutions and the real estate market, and international capital flows are the key determinants of housing price movements in Hong Kong. For the current housing market, we argue that it is still sound and sustainable despite the starkly increasing trend in price. The strong need for residential housing, and the sufficient purchasing power in the banking system are strong support for the current high price level. Also, since Shenzhen’s GDP has already surpassed Hong Kong’s and housing price in Shenzhen is catching up with that of Hong Kong, the occurrence of a 60% property price crash akin to the one in 1997 is very unlikely.
Yang Zhang, Qingyong Zhang and Huanhuan Zheng’s paper entitled ‘Housing policies in Greater China and Singapore’ provides a comparative study of various housing policies in the Chinese mainland, the Hong Kong SAR, the Macao SAR and Singapore, which are distinguished from each other in terms of economic and institutional differences. Specifically, the paper explains the regulation models of each area in terms of the composition of their supply (such as public and private housing), their demand side factors and their supply side policies. In addition, this paper evaluates the impacts of these specific macro-prudential policies to augment our understanding of their merits and demerits. The study itself contains utmost strategic importance as it represents a practical attempt to conduct comparative studies amongst Asian countries and regions, and in particular between China and Singapore. Through clear and effective language, this comparative study deepens our insight into policy responses and macro-prudential risks. The paper firstly gives a general overview of the four housing markets with a particular focus on housing price and affordability to provide a full background for the following comparative study. This section is significant because it helps identify the origins of the key policies and specific regulations. This paper also distinguishes itself by dividing the housing market into two parts – a sizeable public sector and non-negligible private sector. Most studies tend to discuss housing markets in aggregate, while such a distinction is necessary for a more nuanced understanding of affordability. This paper comprehensively details the public housing system in each of the four markets and especially the eligibility criteria for public housing including age limit, citizenship requirements and income ceiling. It provides a clear picture of the various public housing conditions and matching of supply and demand. Though the paper concludes that Singapore has made great achievements in the vast national housing system to offer adequate affordable housing among these four economies, it also considers whether a national system underestimating renting but overestimating home ownership would truly accommodate housing needs. The findings of this study also yield the critical opinion that successful housing policies ought to account for local economic and social conditions. An interesting extension of the paper would be to provide some specific suggestions about how to draw on the lessons of the policies of other economies.
Siu Kei Wong and Ka Shing Cheung’s paper, titled ‘Housing price dispersion in the presale market’, studies whether housing price dispersion will be reduced if developers give more information about quality and price. It employs a new information disclosure ordinance that has been issued to enhance the transparency of first-hand sales in Hong Kong in its natural experiment. To be more specific, this paper raises several hypotheses about the possible impacts of the Ordinance on price dispersion with different types of information according to the general information clearinghouse model, and implements hypothesis testing of the impacts of the Ordinance on the presale market. In the empirical work, the authors compare price dispersion in both first-hand and second-hand housing markets where the Ordinance is the policy treatment. They also discuss the difference in the marginal effects of disclosing more ‘quality information’ and ‘pricing information’. Furthermore, the authors estimate the impact of the Ordinance on price dispersion in the presale market and the spot-sale market as a critical test. The results show different effects under different conditions, where different types of information have varying impacts on price dispersion. The Ordinance is expected to have no obvious impact on price dispersion once units are completed and available for inspection in their critical test. Information about quality does reduce first-hand price dispersion, while price information may have an opposite effect on first-hand price dispersion. This paper introduces the new idea of using different types of information to discuss what influences price dispersion. This may be useful for research work in the future. It also suggests that even though the role of the Ordinance is limited, its effect on the market may be helpful for devising the future policy.
In ‘Tail causalities between monetary supply and real estate prices in China’, Haoyuan Ding, Guoyong Liang, Tong Qi, and Jiezhou Ying fill in the gaps of the existing literature by studying the relationship between monetary policy and the real estate market in China using a quantile regression. The coevolution between China’s monetary policy and its real estate market has been a major economic phenomenon in the country’s era of market-oriented reform. As China is featured as a transition economy with a highly segmented domestic market, examining the asymmetric relationship between housing prices and monetary supply is essential to evaluate the effects of monetary policy on real estate prices. However, this non-linear association is unclear in the existing literature. The authors provide convincing evidence to show that tail causality exists for a large proportion of cities in China. They propose that small cities and inland cities are more sensitive to M2 changes when the returns of the housing market are in the tail quantile intervals. Regarding their implications for the real estate market, these findings can assist the government to formulate appropriate monetary policies purposed for adjusting housing prices.
‘Housing prices and household savings: evidence from urban China’, the paper by Weida Kuang, Tao Li and Jingjian Xiao, addresses the issues of co-moving household savings and housing prices in China in a theoretical way by introducing a framework for developing a three-period life-cycle model. As mentioned in the introduction, they examine the relationship between household savings and housing prices in China using data obtained from the Urban Household Survey. This paper has two main contributions. First, it introduces a theoretical model to illustrate the relationship between housing prices and precautionary savings. In this paper, a three-period life-cycle model is used to demonstrate the effect of housing prices on household savings. Precautionary savings at young age are shown to be positively related with housing prices in Proposition 1. This setup provides a clear framework to analyse the housing prices and household savings in China. Second, this paper identifies different saving motives for precautionary savings. In their setup, households save for their consumption, education and home purchase in their young age. While in their middle age, they save for their consumption and medical care. In other words, households save for different purposes in different stages. Unlike previous related researches, this paper separates consumption, education spending and medical care spending from precautionary savings. This provides a clear framework to identify the sole effect of different precautionary savings. This may also provide a framework for those who want to analyse the effect of housing prices on different spendings. All in all, the housing price is incorporated into different precautionary saving motives to create a precise theoretical framework. It also utilises the Urban Household Survey to illustrate the reverse U-shaped effect the age of the household head has on household savings.
The paper by Alex Yiu and I examines the rental market of industrial building in Hong Kong. The early period of industrialisation in the Hong Kong SAR occurred during the 1950s to 1970s. Manufacturers were engaged in labour-intensive manufacturing processes with the assistance of machines in factory buildings. Since the 1980s, manufacturers in Hong Kong have faced keen competition from neighbouring economies, amidst the rising local costs of land and labour. Moreover, since the adoption of an opening-up policy by the Chinese mainland since 1978, more and more local manufacturers in Hong Kong have relocated their production processes to the mainland so as to take advantage of the lower factor costs. As a result, the contribution of the manufacturing sector to GDP declined from around 20% in 1986 to 2.7% in 2006 and further decreased to merely 1.1% in 2016. Interestingly, there has been a general upward trend of real flatted factory rent in Hong Kong in the past decade. As the contribution of the manufacturing sector to GDP has followed a falling trend in the 21st century, the general rise in real flatted factory rent should not be attributed to manufacturing activities. Also, despite the declining contribution of the manufacturing sector to GDP, the vacancy rate shows a downward trend, which may be attributed to the decline in factory space stock due to redevelopment projects of the old factories as well as the rising non-manufacturing usage. While the redevelopment projects have been very slow, activities related to retail, office operations and living accommodations have increased in factory buildings. This study demonstrates via a threshold regression that not only demand from the retail property rental market has been a factor in the increase of factory rent, but demands from the office rental market and local households have also contributed to the recent rise in real factory rent since 2006 Q1. To the best of our knowledge, this study is the first to look into the determinants of factory rent in Hong Kong empirically.
Concluding remarks
The purpose of this special issue is to collect recent academic studies on the housing market in the Greater China area, focussing on its path of development and current conditions, and making predictions of its future evolution. Since the commercialisation of residential real estate in 1998, the Chinese real estate market has witnessed a surge in overall housing prices and differentiation among cities in different tiers. In the same time period, the Chinese government has implemented various regulations and restrictions to control the excessive rise in real estate prices. Today, China’s housing policies are of a short-run temporary nature and tend to be swift responses to market development, but most of them have incurred distortions in credit and resource allocations, which could potentially fuel the expansion of real estate market bubbles.
Unlike the markets of the Chinese mainland, where the credit market plays a dominant role in determining housing prices, the movements of housing prices in the Hong Kong SAR are mainly determined by demand and supply. While demand is closely related to population and economic growth, the Hong Kong SAR government holds exclusive control over the supply of land due to its land leasing policies. Also, the property market in Hong Kong is closely linked to the rise of Shenzhen and increase in the real interest rate. Shenzhen’s housing prices serve as a lower bound for Hong Kong’s housing prices, meaning the room for Hong Kong’s housing prices to drop, if any, will be limited to around 30%. Despite the increase in the US interest rate, the mortgage interest rate has only risen by 0.125%. A continuing negative real interest rate environment gives rise to speculative behaviours in the property market, which could eventually result in an elevated price level.
The US-China trade conflict will continue to weigh on the business outlook and housing markets in the Greater China area. The trade conflict and the ensuing economic uncertainty are set to dent housing demand in the Chinese mainland. Housing rents will likely soften in trade- and manufacturing-driven cities where there is excess of supply. However, new infrastructural developments will drive the formation of strategic hubs and counterbalance much of the downside risk. With strong support from an improving funding environment, domestic and foreign investors will continue to seek opportunities in the Chinese mainland. The housing prices in Hong Kong may experience a temporary drop due to recent social movements. Nevertheless, since end-users and longer-term investors will remain active in Hong Kong, investment demand for housing is expected to remain solid. Taiwan of China will be less affected. Retailers in Taiwan will adopt a conservative approach towards restraints on tourists journeying to this region, while the gradual reshoring of Taiwanese manufacturers is expected to benefit the Taiwan property market. Macao’s property prices will rise due to increased demand, caused by the return of tourists to the city and the recovering gaming industry. Compared with China’s Hong Kong and Macao SARs, Singapore seems to have been more successful at providing affordable accommodation. The housing price is anticipated to stay flat, however, due to the slow growth of the economy.
In conclusion, cities in the Greater China area have to work out a way to cool down the overheated real estate market, not only for macroeconomic stability, but also for the welfare of their residents. Governments should pay attention to the variation of different economic conditions across different types of cities, especially the extreme price levels that are more vulnerable to exogenous shocks. Policymakers should tailor specific policies to sub-economies, rather than to impose general policies within the entire economy, in order to effectively find a balance between public welfare and growth.