China’s Housing: Living in a Bubble

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China’s Housing: Living in a Bubble

Despite government measures, housing is increasingly out of reach for ordinary Chinese.

Rising home prices, especially in major cities, are prompting a growing chorus of discontent among ordinary Chinese. My Japanese friends would no doubt feel more than hint of nostalgia should they visit Beijing. For just like the famous Japanese “bubble economy” of the late 1980s, Beijing has been virtually turned into one big construction site with constantly changing streetscapes.

Certainly, China’s housing market has been amazingly bullish for many years. Official figures for Beijing homes put the average price at $3,800 per square meter, up from around $500 per square meter in 1989 (incidentally, the peak of the Japanese real estate froth).

But don’t try telling Chinese real estate developers it’s a bubble. In their eyes, the local real estate market is no such thing. Prices will only continue to rise, they argue.

Ren Zhiqiang and Pan Shiyi are general managers of two well-known real estate companies. They successfully "predicted" the housing bull market, making them opinion leaders on Sina Weibo (China's Twitter), where they each boast about 15 million fans. While young people in other countries might admire Bill Gates, Mark Zuckerberg, or other famous entrepreneurs, Chinese netizens are starry eyed about two real estate developers. It is as good an indication as any of the tremendous influence that real estate has on Chinese society.

For their part, Ren and Pan have been harshly critical each time the Chinese government unveils measures in yet another bid to control the runaway market. And indeed, the government has not been hesitant about expressing its concerns, former Premier Wen Jiabao noting publicly that real estate prices were unreasonable, and tighter regulations were needed.

In 2006, a friend of mine bought a house in central Beijing. He paid about 10,000 yuan per square meter. Six years later, the price had risen to 60,000 yuan per square meter. That, of course, far outstrips any increase in the average wage over the same period. No wonder, then, that Chinese like to joke, “When it comes to house prices, the premier has no say, as it depends on the general managers."

For young Chinese owning your home is part of the “Chinese Dream.” The traditional view is that the house you live in ought to be your own. If you rent a house – no matter how lovely it is – it still belongs to someone else. In particular, goes the thinking, young couples planning to wed really should be having a new home. That explains the success a couple of years ago of the movie Dwelling, which has a plot based on that very same viewpoint.

It is this tradition that has always made rising home prices a social issue in China. Combine that with corruption, the increasingly tough time new graduates are having getting employment, forced relocations, and other issues, and the Chinese government unsurprisingly recognizes the political sensitivity of real estate.

A former railway minister, who lost his job over corruption, was found to be in the possession of no fewer than 374 houses. He’s not alone. Other officials have been found to own dozens or even hundreds of houses, not for sale or for rent, but for potential capital gains. That of course doesn’t sit well with ordinary Chinese who struggle to afford even one home. The explosiveness of stories of real estate corruption is a major reason why the Chinese government seeks to control real estate prices.

In China’s smaller cities, real estate price increases have been relatively mild. Consequently, residents are permitted to acquire multiple homes, assuming they have the money. Conditions are much stricter in Beijing, Shanghai, and other major cities with runaway housing prices. In these markets, the Chinese government has restricted home buying, as a key measure for controlling prices. In Beijing, for instance, you can buy your principal place of residence; buying a second home becomes much more difficult. In Guangzhou, you can buy a second home, but at a much higher lending rate.

This registered permanent residence is an important link for Chinese and their city. If you have no permanent residence but you want to buy a house, you must submit a local work certificate and a social insurance enrollment certificate for five years in a row, otherwise you're out of luck.

The government likes to think that these purchase restrictions are effective at controlling home prices, but what ordinary Chinese want is greater transparency. It is for instance almost impossible to get information on house purchases from the Internet, which means that nobody knows which officials own multiple properties. The suspicion is that the government dare not offer this kind of transparency, because it would reveal legions of civil servants with more than the allowed number of properties in their possession.

But although ordinary Chinese complain constantly about rising home prices, don’t expect them to take to the streets in protest, like some of their overseas counterparts. Ask young people why they don’t protest, and you’ll often hear the answer: “What is the point of taking to the streets? you could just end up even worse off."

In the major cities, most young people are forced to use money from their parents to make a down payment on a mortgage loan, and then work hard and live frugally to repay the loan. The down payment is usually 30% of the total price, and the monthly installment payment usually represents 30-40% of their wages. It is quite common in China for this commitment to almost entirely take over one’s life. Most people resign themselves to their fates, criticize the government on the Internet, save a few harsh words for the likes of Ren Zhiqiang and Pan Shiyi, and then leave it at that. Still, each report of higher prices chips away at the government's credibility.

The real estate industry may have played a role in China’s economic development, but it appears to have been for the benefit of the few at the expense of the many. In the long term, the trade-off seems poor. For that, not just the general manager, but the premier too needs to take responsibility.