¶ … Housing Market in China: A Critical Survey of the Literature This is a critical survey of the literature on the state of housing market in China. It highlights the high and rising cost of housing in major markets, which have attracted worldwide attention, as well as the interest of the Chinese government. It is difficult to understand the Chinese housing market without delving into the background. In this regard, the paper also examines the housing reforms and the growth of housing sector in general. Furthermore, the paper looks at Price-to-rent ratios in Beijing and seven other major housing markets in China. The findings suggest that even simple declines in expected appreciation would result in substantial price declines in these markets. It concludes that Price-to-income ratios are at their peak in Beijing and some selected Chinese housing markets.

Introduction

Since the beginning of People's Republic of China, most of the citizenry in most urban areas depended on the public housing system, which provided them with low cost accommodation. This was operated under the Collecting Rent to Support Public Housing policy adapted in 1949 by the government (Zhang & Zuoji, 1996). Under this policy, the government received little amount that compensated the depreciation, maintenance as well as the management of the project. Therefore, the government's role was construction of the houses and thereafter the project was self-sustaining based on the nominal rent charged. This policy was reviewed in the 1950's a time when the country was undergoing socialist transformation, this le to the suspension of the project as it could no longer be self-sufficient as the public housing rent was further reduced by half. Thereafter, the project was not sustainable as there were inadequate funds to support the after-construction expenditure. However, the government still maintained a welfare housing policy, which went on up to 1970 (Zhang & Zuoji, 1996). With the increased rural urban migration, there has been a rapid urban population growth that has resulted in inadequate systematic urban development planning. In addition, this has resulted in bias capital investments, and unstructured public housing system causing a severe housing crisis in major Chinese housing markets. This paper among other issues will examine the urban housing policy outlined by four periods representing four major housing policy shifts.

The recent increase in the cost of housing in China has been the focus of global interest. The cost of housing has increased by over 200% over the last ten years across 35 major cities, with at least two thirds of that increment occurring in the first months of 2007. This trend is on the increase without any sign of slowdown (Wu, Gyourko, & Deng, 2010).

This boom is happening despite the adoption of an economic stimulus program in 2008 that was meant to calm the country's economic growth rate to an annualized 11.9% by 2010. This does not seem to have restored the increasing the total outstanding loan balances which stood at forty percent, or the outstanding residential mortgages.

The Government is clearly concern about the situation in the housing sector. However, it is challenging to determine the cost level in regard to the fundamentals. This is because there is a limitation of data resulting in little study of the situation or even interpretation. In addition, time series on the cost as well as quantities are longer than ten years because 1998 marked the establishment of a true private market with competitive bidding and pricing of property. This paper describes and analyses the price-to-rent and price-to-income data of the Chinese situation in a bid to shed light on the affordability metrics for eight main Chinese housing markets. These include Beijing, Chengdu, Hangzhou, Shanghai, Shenzhen, Tianjin, Wuhan and Xian. Nonetheless the income in most of these housing market have been relatively at par or slightly more than the cost of housing in Chengdu, Tianjin, Wuhan and Xian over the past few years. This is contrary to the coastal regions as well as in Beijing where the growth of housing cost has exceeded the high income growth witnessed in those markets. This paper aims at confirming the recent data indicating that price-to-income ratios are at their peak in Beijing, Hangzhou, Shanghai and Shenzhen. The details suggest that rent as opposed to the price of houses has not grown significantly in the major housing markets. In addition, a body of research reveals that in the past few years the price of rent has tremendously gone up (Wu, Gyourko, & Deng, 2010).

Literature Review

According to Deutsche Bank...

This paper points at a sharp increase in the cities to west above fundamentally justified levels. However the national momentum is still at a high level in the key cities of Beijing and Shanghai. In addition, housing in the top five cities is still unaffordable.
Ka Yui Leung and Wang (2007) in their paper, An Examination of the Chinese Housing Market adopt the DiPasquale and Wheaton model (1996) to examine the state of the Chinese housing market by investigating the effect of different policies. This model is able to account for improvement in the Chinese market. They also use the model in assessing the state of dual-class housing for the analysis of a recent policy shift in China as well as the potentially independent interest of other countries. The authors in their findings provide that it would take cross-subsidization to attain the ratio goal of large vs. small housing units ( Ka Yui Leung & Wang, 2007).

Hongyu and Ying (2004), in Prospects of Real Estate Markets in China Provide analysis of the state of the Chinese real estate market form the point of housing supply, conditions, real estate development investment, cost of real estate as well as financing. They also analyze the growth potentials and prospects of the market in regard to long-term sustainable development. The paper also points at the opportunities for foreigners in professional services, financing, institutional investment and construction technology related to real estate.

Housing Reform

As mentioned earlier, the government of People's Republic of China nationalized and owned urban housing units in 1949. Since that time leading to 1980s the government controlled the national economic plan and monopolized the distribution of housing in the country. The State Budgetary Funding was the financier of these governments owned housing projects. At this time, the private housing market was unheard of. However, in the 1970s this trend started changing as the country undertook a chain of economic reforms. The government then initiated a privatization exercise where it built residential housing units in several coastal cities, which later expanded to all the other cities in the country. This is the reform that led to the development of the private housing sector with the first real estate developer established in Shenzhen in 1980. Despite this progress, most of the early construction of the commodity housing sector was done for those who could afford them, including foreigners or those employed in non-state-owned establishments. Therefore, the scope of this early market was limited in scope and its growth minimal (Wu, Gyourko, & Deng, 2010). In 1988, there was a major shift in the housing sector with the passage of the Constitutional Amendment, which engraved legal foundations for the growth of the private housing market. However, the state still held on to the ownership of urban lands, though it permitted investments to lease or purchase the right of use for urban residential construction for up to 70 years. The government made further progress in 1990 by issuing a chain of reforms that targeted private housing market in order to encourage development of private housing markets. Under these reforms, residents were encouraged to buy housing units they resided from their state-owned work units at subsidized rates (Discussed in detail under the Urban Housing section). Consequently, the work units were directed to terminate the direct housing allocation system. The milestone in the housing reform took place in 1998 when the State council gave a decree under which, the work units were prohibited from constructing housing units and instead harmonize any housing benefits into their worker salaries. This was regarded as the dawn of modern private housing market in China. Report by State Statistics Bureau (2001), indicated that the total annual flow supply went up from13% in 1986 to 33% in the year 1993. The report further indicated that the annual flow supply later stabilized remaining that way for the rest of the next 13 years until 2006 when it went up to 72%.

Urbanization and Migration

China has continued to experience a strong urbanization trend and this has been a major factor in the rising demand for housing in China's major housing markets. According to State Statistics Bureau (2001), urbanization went up 50% from 370 million to 560 million between 1996 and 2005. The rate of urbanization has been on a steady increase at 1.4% yearly since 1996. It is estimated that there are…