housing market in urban china

University of Nevada, Reno Housing Market In Urban China A thesis submitted in Partial fulfillment of the Requirements for the degree of Master of Science in Economics by Limin Liu Dr. Shunfeng Song / Thesis Advisor May, 2007 UMI Number: 1442879 1442879 2007 UMI Microform Copyright All rights reserved. This microform edition is protected against unauthorized copying under Title 17, United States Code. ProQuest Information and Learning Company 300 North Zeeb Road P.O. Box 1346 Ann Arbor, MI 48106-1346 by ProQuest Information and Learning Company. THE GRADUATE SCHOOL University of Nevada,Reno Stdlewldr - 'llorldwlde We recommend that the thesis prepared under our supervision by LIMIN LIU Entitled Housing Market In Urban China be accepted in partial fulfillment of the requirements for the degree of MASTER OF SCIENCE I Professor Shunfeng son& Advisor Pkifessor Glen Atkinson . Committee Member /i/- h & ,b / r - L. Professor k'&nlin Liu, Graduate School Representative - A-w'A - " Marsha H. Read, Ph. D., ~gciate ~dan, Graduate School May, 2007 i Abstract Since the late 1970’s, the Chinese government started housing system reform along with land use system reform. Along with the real estate industry booming, the housing price also sky jumped, the average selling housing price was increased 15.5% in 2004. The affordability of housing is becoming a heated social issue in China. This paper reviews the development of Chinese urban real estate from 1950’s to the present. Based on the analysis of the current situation from land use rights system and market, affordability of housing price and housing cost, as well as the real estate finance development, it provides readers with a fundamental concept of the China real estate market, and explains the real factors of high housing price in urban area. Finally, it concludes with recommendations for improving the Chinese urban housing market. ii Table of Contents Section 1: Background 1 1.1 Socialist of Transformation of New China………………………………… … 1 1.2 The Bureaucratic Housing Allocation System…………………………………. 3 1.3 Development of Urban Real Estate Market before 1998…………………… …5 1.4 Summary of The Transition in China’s Real Estate Market………………… 13 Section 2: Land Administration System and Land Market……………………. 18 2.1 Land Administration System………………………………………………… 18 2.1.1 Institutional Change of property rights……………………………………… 18 2.1.2 Features of the Land Use Right System……………………………… 20 2.2 Land Distribution and Leasing Policy……………………………………… 22 2.3 Land-Use Taxation……………………………………………………………. 24 2.4 Current Urban Land Market………………………………………………… 26 2.5 Problems of China’s Land Market……………………………………………. 29 Section 3: Analysis of the Housing Price………………………………………… 35 3.1 Affordable housing? ………………………………………………………… 37 3.2 The Macro-Factor Which Influence the Housing Price………………………. 39 3.3 What Pushed up the High Housing Price? 43 3.3.1 Does land Price Pushes up the Housing Price 44 3.3.2 Does Housing cost Pushes up the Housing Price? 46 3.3.3 Does Real Estate Taxes and Fees Pushes Up the Housing Price? 51 3.3.4 Is little Profit in Real Estate Industry? 53 3.4 Unique Phenomenon in China’s Real Estate Market…………………………. 55 Section 4: The Housing Finance…………………………………………………. 60 4.1 Current Urban Real Estate Finance Market in China…………………………. 63 4.2 Housing Mortgage Loan……………………………………………………… 64 4.3 Problems in Chinese Real Estate Financing Market………………………… 68 Section 5: Conclusions……………………………………………………………. 72 Figures…………………………………………………………………………… 76 Tables……………………………………………………………………………… 78 References…………………………………………………………………………. 94 1 SECTION 1: BACKGROUND 1.1 Socialist Transformation of New China The development of the real estate market in China can be traced back to the year 1949, the year viewed as which the watershed in the country’s real estate market. Prior to 1949, private land ownership and real estate market existed in China, and land transactions were quite frequent. The Guomindang (Nationalist) government recognized and protected private property ownership. However, the government’s role in the housing sector was mostly symbolic at that time. Studies showed that there was no effective housing policy prior to 1949 (Zhang, 1997). The Chinese Communist Party (CCP) came to power in 1949. This marked the start of fundamental changes in China’s political, social and economic policies. Among them were the changes of land ownership. As Zhang (1997) stated, the CCP had shown its commitment to the abolition of private ownership since its foundation in 1921, and “the abolition by the CCP of private ownership of land by large landlords in rural areas found strong support from farmers in the 1920s–1940s.” Land ownership reform proved to be the principal driving force for the success of the socialist revolution of the CCP. After the founding of new China, the CCP government started land reform (Tu Gai) to reduce social inequality by confiscating land from the rich (landlords) and then redistributing it to the poor (Ding, 2003), because according to the Constitution of the People’s Republic of China, the state owns all urban land and has the authority to redistribute it. 2 During the transition period between 1949 and 1957, the government allowed the coexistence of public and private properties and the construction of new housing with both public and private finance. In 1958, the state began to take over all urban private housing. In Beijing, for example, there were 920,000 privately owned units in 1949, accounting for 77% of the total homing stock. By 1958, only 34% of all homing units in the city were private (Song & Chu, 1999). Nationwide, all land was either state or collectively owned (Ding, 2003). Between 1958 and 1978, the state limited capital investment for new homing construction, which was regarded as consuming rather than producing national output (Song & Chu, 1999). Between the mid-1950s and late 1970s, less than 10% of total capital investment was channeled into new housing construction (Chen & Gao, 1993). Low investment in housing construction resulted in low supply of new housing. Overall, development of real estate between 1949 and 1978 was very slow. As a matter of fact, there was no real estate market, nor were there market prices or rents. Due to the rapid population growth, urban housing supply was far below the housing demand. Records showed that per capita living space decreased from 4.0 square meters in 1953 to 3.6 square meters in 1978 (Song & Chu, 1999). The shortage of housing in urban areas became a big problem for the Chinese government. 3 1.2 The Bureaucratic Housing Allocation System Before we study the development of real estate market in China, it is essential to review the public housing policy and housing allocation system which took effect after 1958. In socialist China, public housing is considered a welfare benefit, which is mainly provided through a bureaucratic housing allocation system. The state allocated urban land to public work units (called Danwei) free of charge. The Danwei system, which is a unique structure of socialist China, played an important role in the housing allocation system. Danwei primarily refers to government agencies, public institutes, and state-owned enterprises (SOEs). For Chinese, Danwei work unit is not simply a place of working and earning a living. It has many other economic, political and social functions as well. Danwei plays a crucial role in organizing its employees’ lives. Many social services are administered through Danwei (Whyte & Parish, 1984). Danweis routinely provide housing services to their employees through a housing allocation system. Most public housing was funded, built, and managed by work units. The First National Housing Survey in 1958 showed that 90% of public housing was owned by work units, the remaining 10% was owned by government (Zhang, 1997). Virtually all public housing were allocated to workers through this bureaucratic allocation system. The government used public housing as a primary benefit for employees of public sectors. Housing was allocated based on a set of administrative criteria such as job rank, political status, and professional qualifications. The allocation of housing 4 spaces was linked to a potential tenant’s rank rather than to his or her actual housing needs. In allocating housing, a points system gave the most weight to each individual’s rank and length of services. In case an employee has ever worked for other Danweis before serving the current Danwei, the length of services in other Danweis will be counted as well, but at a lesser weight in the point system. According to Zhang’s (Zhang, 1997) explanation, this distribution system was designed to reflect the socialist distribution principle of “to each according to his work (called An Lao Fen Pei)”, assuming that rank and length of services can accurately reflect the contribution an employee has made and will make in the future. For this reason, housing needs are treated as secondary factors. And since a person’s performance or contribution could be best judged and monitored by his or her work unit, the work units’ control over housing services could ensure the proper allocation of housing benefits. This housing allocation system has numerous disadvantages. First, the points system cannot accurately measure employees’ contributions to the work unit. As earlier stated, the housing allocation system was employees’ job ranks or social statuses as a primary factor in calculating their scores. However, an individual’s job rank is determined by many political and ideological factors, not solely determined by one’s performance and contribution. Secondly, it resulted in inequalities of housing conditions among different work units. As Zhang (1997) stated, Danwei varies in terms of importance for the government. Key agencies and enterprises were given higher priorities in resource 5 allocation and were usually able to fund better housing for their employees, while less important work units found it difficult to meet the minimum needs of their employees. Thirdly, people’s housing choices of location, size, quality, and tenure were deprived (World Bank, 1992). In the housing allocation system, housing is a benefit package offered by Danwei, and people could only accept whatever is available to them. They can then rent or buy it at a price much lower than the market price. Finally, under the planned economy system, housing allocation system was simply designed for Danwei to distribute their housing stocks. Market demand was never considered. Therefore it could not satisfy urban residents’ needs. Between 1949 and 1978, housing investment amounted to only 1.5% of Gross National Product (GNP) annually (World Bank, 1992). At the same time, urban population growth has more than double the size, from 71.63 million in 1952 to 172.45 million in 1978 (CSSB, 1996). The urban housing shortage became one of the serious problems. Most urban residents were living in extremely crowed condition, per capita living space was only 3.6 square meters in 1978 (CSSB, 2000). Obviously, housing allocation system failed to provide better housing service for urban Chinese residents. 1.3 Development of Urban Real Estate Market Before 1998 Before 1978, nearly 75% of industry was controlled as state-owned enterprises. Most Chinese employees were living in the public-owned housing units and did not have any housing properties. Since 1978, the real estate market in China has experienced three phrases. The first phrase occurred between 1978 and 1982 and it is called pilot-program period. In [...]... 2001) The project intended to help middle and low-income households buy housing at cost or standard price Overall, these new housing polices have changed the housing market Commercialization of the housing construction process was particularly successful 9 Along with the China s economy booming and increasing in urban householders’ income, the demand of housing has become stronger According the National... 0.78% of China Gross National Product (GNP) in each year China has been undergoing rapid changes since Deng Xiaoping instituted the economic reform in 1978 From a planned economy to a market- based economy, China experienced the rapid transition from an agricultural society to an industrialized urban society Investment in real estate industry increased each year, reaching RMB 1315.8 billion Yuan in 2004... improved the housing conditions of Chinese people By the year of 2004, following more than two decades of rapid economic growth and housing construction, per capita floor construction space in urban area increased, from 6.7 square meters in 1978 to 26.1 10 square meter in 2004 Figure 1-1 presents the per capita construction housing living space in urban China from 1978 to 2005 In recent years, the increase... growth rate of investment in the real estate industry drastically slowed down in the following year Table 1-1 shows the increate rate of commodity housing sales and investment in real estate development The commodity housing sales reached peak in 1993 by increasing 102.5% over the previous year and the investment in real estate development also leaped to the highest point, which was increased 165.4... estate market is the rise in the proportion of individual investment-oriented housing purchases Because of the low interest rate and the quick increase of housing prices, many people invested their money in the real estate market The PBOC (2005) report estimated that 20% of the housing purchases in the Changjiang river delta were investment-oriented A 2004 survey by the Ministry of Construction indicated... the housing purchases were investment-oriented Among them, 28.5% were sold shortly after purchasing, 23.5% were used as rental housing, and 48% were vacant, waiting for price increases (PBOC, 2005) The rapid rising of housing prices attracted real estate speculation as well In major cities, speculators bought in housing, caused the shortage of hosing supply and then push up housing price quickly in. .. half of 1993(Sun, 1995) Within one month, there were 2000 enterprises established in Hainan province In 1993, there was more than 20 thousands real estate enterprises involved in the Chinese housing market As the result, the investment in real estate development was increased dramatically In 1992, total investment in real estate investment was 5410 million Yuan, which was 114% increased from the previous... Carry out Urban Housing , “Land Administration Law Implementation Ordinances”, and "Administrative Ordinances on Urban House Demolition and Relocation" 1992 Government encourages its citizens to purchase housing at a subsidized price Defined contribution provident housing funds established at the city level to 16 provide lower-cost financing for workers who want to purchase public housing Housing Provident... value in regional levels According to the report from Chinese urban land value dynamic monitor system (China Land Reconnaissance Programming Academy, 2005), in 2005, among 11 major Chinese cities, there are 8 cities’ housing land values higher than the average land value, which indicated that housing demand still strong The housing land value in Guangzhou, Hangzhou, Shanghai, and Beijing had increased... 1994 Chinese People’s Congress passed "Urban Property and Land Administration Law" 1995 Government launches a housing reform program to provide sufficient housing, especially for low- to middle- income workers Efforts taken to ensure funding for construction and remodeling of residential units 1998 Welfare housing ceased SOEs are required to terminate building new houses Integrated housing benefit into . Phenomenon in China s Real Estate Market ………………………. 55 Section 4: The Housing Finance…………………………………………………. 60 4.1 Current Urban Real Estate Finance Market in China ………………………. 63 4.2 Housing Mortgage. 9 Along with the China s economy booming and increasing in urban householders’ income, the demand of housing has become stronger. According the National Bureau of Statistic of China, in 1993, the. of real estate market in China, it is essential to review the public housing policy and housing allocation system which took effect after 1958. In socialist China, public housing is considered