By Bonnie Liu
Purchasing Homes: Difficult to Impossible
“My next life,” is Tu Shan’s response to the question, “When is the soonest time you can afford a home in Beijing?” Tu was not being facetious in the interview, however. A young apprentice at a Beijing salon, Tu works 12 hours per day, 27 days per month, and earns a monthly wage of 4,000 yuan, meager in a metropolitan like Beijing. Tu, along with four other apprentices, lives in a rented one-bedroom apartment in Haidian District, costing 5,000 yuan per month. As to his opinion on the housing market, Tu responded almost nonchalantly, “No thoughts. I cannot pay for any; it has nothing to do with me, so I have stopped caring.” Tu’s pessimism is not unjustified; he gestured to the south of the salon: a second-hand apartment in the 21-story across the street? It costs 120,000 yuan per square meter. “It will take me 2.5 years without eating or anything to buy one square meter,” said Tu.
Many millennials and members of Generation Y, like Tu, may never live to afford homes in Beijing. According to Beijing Municipal Bureau of Statistics, average property price in Beijing was 60,738 yuan per square meter in the 2017 fiscal year. Meanwhile, per capita annual disposable income for all households in Beijing was 57,230 yuan, while per capita consumption expenditure was 37,425 yuan. Thus, annual per capita savings, presumed to be the difference between income and expenditure, is barely sufficient to procure 0.3 square meter, or 3.5 square feet, of housing.
To cope, some adopt a quasi-crowd funding mechanism manifest in a popular saying: “purchasing a home empties six people’s bank accounts.” Such is the strategy of Li Yonglin, a clerk at Fangshan County People's Court of Justice, who elicited extensive financial support from parents of both herself and her husband to purchase an 87.7 square meter apartment for 1.09 million yuan in 2011. Due to the remoteness of their apartment, Li spends 4 hours commuting via subway daily.
"Beijing is a great place for work, not for living,” says Guo Zeping, 36, an associate professor at the prestigious University of International Business and Economics. “Daily expenses are high, making life here exhausting,” Guo remarks during the interview as he enumerates the various sources of annual expenditure: inelastic expenses 55,000 yuan; mortgage 24,000 yuan; raising a kindergarten child 20,000; and personal income taxes 8,900. Guo’s annual income of 120,000 yuan places him comfortably above average, yet he is nonetheless burdened by mortgages for an apartment he acquired 6 years ago when the market was not as inflated. Meanwhile, even some government officials and corporate managers struggle to afford housing within the Fourth Ring Road close to downtown, amongst whom is Chen Feng, a high-level executive who earns a salary of 400,000 yuan.
Meanwhile, there are lucky exceptions. Zhang Min, a psychologist at Beijing Aerospace General Hospital, reported in an interview that she was fortunate to win the lottery amongst 100,000 households vying for 2,000 affordable apartments in 2016, and immediately purchased the 80 square meter apartment outside the Fifth Ring Road. However, Zhang is the rare exception, not the norm. Prerequisites for entrance into the lottery include a Beijing hukou (residence permit), annual income lower than a prescribed threshold, and official employment in the public sectors, precluding many migrant workers. Zhang and her family revel in excitement as their apartment doubled in value in merely 2 years, a victory for homeowners and a nightmare for home-seekers.
As a result of large base population, property speculation, inadequate regulation, cultural obsession, and urbanization’s population influx, already astronomical housing prices continue to soar. According to a real estate flyer, a square meter of housing that used to cost 5,500 yuan in 2005 now costs 100,000, a near 20-fold increase. Zhang furthered, “Unless some sort of major catastrophe occurs, housing prices will not fall.” Beijing is not a coincidence, however; other first-tier cities like Shanghai, Guangzhou, Shenzhen, as well as several second and third-tier cities witness the same perturbing phenomenon.
Meanwhile, with commodity housing land use rights standing at 70 years, and design life at merely 50, as published by the Ministry of Housing and Urban-Rural Development, harrowing label prices buy consumers neither permanent entitlement to residence nor high quality housing.
Dangers of Emerging Housing Bubble
Contrary to popular belief, China’s GDP growth is mainly fueled by the real estate sector, instead of progress in value-added sectors like high-tech, service, and manufacturing. Due to concentrated devotion of resources to housing, the real economy faces severe setbacks. Beijing’s GDP increased by 6.7 percent in 2017, while its primary sector actually decreased by 6.2 percent. Since the housing industry and its derivative products contribute up to 33 percent of Chinese GDP, with effects filtering through 40 related industries, China’s economic prosperity is critically contingent upon containing the looming destabilizing bubble. Capital flows quickly from banks into asset markets via loans, inflating the real estate bubble, detracting from and stagnating real economic growth, and perhaps aggravating a financial market crash. Manifest in the 2008 subprime meltdown, when the housing bubble bursts, a domino effect will precipitate large reverberations concerning economic growth, employment, financial stability, and consequently Communist Party reputation.
Property Obsession: Cultural
Motivations for purchasing property are variegated if not innumerable, the most prominent motivation being cultural belief. Owning property symbolizes social status and economic success and constitutes a nontrivial criteria in selecting prospective spouses, a burden especially heavy on the male counterpart. Tu opines, “There is this habit of interpersonal comparison, which stems from the human nature of vanity.” Simply owning homes is not enough for young couples: Zhang and her husband are already planning to stock up more for their 4-year-old son. In fact, the preponderant real-estate obsession is historically ingrained. One traditional Chinese adage emphasizes that “a happy life is residing in peace and working with contentment,” which necessitates owning property. Li opines, “[The real estate sector] is a psychological battle of the masses against the masses, especially speculation.”
Property Obsession: Economic and Financial
From an economic perspective, Beijing residents accumulate homes partially due to lack of alternatives for stashing savings. Volatile stock values fluctuate haphazardly, while savings accounts interest lags behind inflation; on the contrary, predictable housing prices rise consistently, earning real estate the reputation as a foolproof vehicle to harvest colossal profits, and encouraging property speculation. Since 2003, waves of Wenzhou property flippers and Shandong coal bosses have speculated property, purchasing housing by the building. Since speculation exacerbates socio-economic inequality, Jan Pen’s income parade in cosmopolitans like Beijing is unimaginably harrowing: The opulent hoard multiple homes that are leased or remain vacant, while the deprived desperately seek a viable place to inhabit, testifying to massive resource misallocation. No longer a consumption product for residence, housing has evolved into a lucrative investment. In absence of alternatives, those unable to afford housing are forced to retreat to their hometowns, leaving their Beijing dreams unfulfilled.
Multiple interest groups fetter the stabilization of reasonable home prices, including central and local governments, banks, real-estate developers, brokers, and current homeowners. Succinctly phrased, everyone except those who have not bought homes hopes for rising prices.
Obstacle: Central and Local Governments
Primarily, local governments represent major obstacles as they heavily depend on sale of land-use rights for revenue. Since commodity housing is developed on state-owned land, governments are financially incentivized to refrain from substantive pricing regulation. Local governments are confronted by an ethical dilemma whereby their benevolent goal of promoting welfare conflicts with their pecuniary goal of collecting revenues. Achieving the former requires keeping homes accessible, while accomplishing the latter favors higher prices.
Furthermore, the central government lacks a backbone industry fueling GDP growth. Previously, housing was treated as national property allocated to individuals for utilization via employment institutions. Since the late 1990s, the nation's economic emphasis has shifted from automobile manufacturing to housing, accompanied by housing commodification that invigorated upstream and downstream industries from cement to furniture. Due to indispensable contributions of real estate to the national economy, China’s central government is reluctant to drastically intervene.
Aside from governments, financial institutions also have vested interest in elevated housing prices. Since home-buyers often offer homes as a collateral when taking on mortgages, banks must rely on collateral for satisfaction of claims in case of default. However, if housing prices depreciate, collaterals become less valuable than initially expected, causing banks to suffer deficits and triggering collapse of the financial system.
Simultaneously, banks loan to profitable real estate developers instead of SMEs composing the real economy, further incentivizing the sector. Logically, greater competition amongst developers and increased supply of housing would decrease the market equilibrium price; however, this is merely wishful thinking. According to the Law of Land Administration, all municipal land is state-owned under socialist public ownership of land, and all commodity housing must be constructed upon municipal land, as stipulated by the Law of Urban Real Estate Administration. Thus, real estate companies must procure land use rights (LUR) from local governments through bid invitation, auction, and listing. Finite land in conjunction with elevated demand for LUR culminates in higher LUR prices and subsequently housing prices.
Recent Policy Solutions
Fortunately, hope of stabilization is within sight. President Xi announced in 2017 that “Houses are for living in, not for speculation.” A government work report further reiterated "We will support people in buying homes for personal use, and develop the housing rental market and shared ownership housing.” In response to the clarion call, remedial measures were staged in attempt to cool the market, including restricting mortgage lending, increasing down payments and mortgage rates, capping maximum number of homes residents can procure, limiting financial leverage for developers, and subsidizing construction of affordable housing. For instance, The Beijing Municipal Commission of Housing and Urban-Rural Development announced, “local families owning two or more homes and non-locals with no record of paying social insurance or income tax for five years are prohibited from buying a single-story house.”
Currently, taxation only occurs in the initial acquisition of housing, not the subsequent possession. As legislators push to institute property taxes, such proposals face adamant opposition as well as practical hindrances. Debate enshrouds questions like whether to tax property based on initial or current prices. Base on low initial prices, the tax may be ineffective in deterring speculation. Base on exorbitant current prices, overwhelmed homeowners, who must dedicate around two years income to merely pay property taxes, may sell their homes, inadvertently accelerating a housing bubble burst.
Certain demand side policies that decrease local population, such as via creating the Xiongan New Area economic zone, tightening residence restrictions, or eliminating unsafe and overcrowded housing, are lamented as discriminatory and targeting the most vulnerable and impoverished communities.
Further solutions must be devised and implemented. National and local governments must straighten conflicting agendas and coordinate policies regarding land and housing prices. The former must cease its excessive reliance on the housing sector in blind pursuit of unreasonable and unscientific GDP growth, while the latter must similarly investigate alternate sources of revenue other than LUR sales. To alleviate pressures from the real estate market, regulation of rental markets must be strengthened, and development of low rent housing, public rental housing, and shared ownership housing must be subsidized.
Establishing property market control mechanisms is pressing, and should be approached from aspects of land, rational financing, appropriate taxation, multi-tier housing supply, and up-to-date property laws. For long-term stabilization, the government should institute policies that remain consistent and predictable throughout upswings and downturns, perhaps with inherent anti-cyclical measures to preempt seasonal bubbles. To strengthen market structure, domestic rating agencies must be authentic and transparent. Both housing and financial markets must accurately and rationally reflect supply and demand as well as risks and rewards, instead of blind speculation.
* Some information in this article comes from personal experience and in-person interviews with Beijing residents. Names of certain interviewees have been altered at their request to protect privacy.