Housing Market Reform and the Affordability Problem in
In China, before the “open door policy” and 1978 economic reforms, housing was
a form of social welfare offered by the government. The government distributed residences according to a person’s “political stature”. The term “commercial housing”
did not emerge in the literature until the 1990s. The market mechanism of distribution was considered a “poison of capitalism”; therefore, there was no affordability problem
in those days. However, in such circumstances, supply shortage was an issue. Because there was no profit in housing then, the motivation for investing in housing was low, and the housing supply grew at an extremely low rate at a time when the population was increasing dramatically. In Shanghai, from 1955-1978, the annual housing investment as a share of total property investment was less than than 5% every year,
2while the per capita building space in urban areas in 1952 was 3.4 m and in 1978 was
224.5 m, an increase of just 1.1 m in 26 years.
China’s “open door policy” and economic and political reform began in 1978, and
now after decades of development, market reform has succeeded in many industries. However, the housing market made little progress between 1978 and 1998 as the debate over whether housing should be a commodity or a form of social welfare raged
on. The direction of housing reform has changed many times, and a new policy came around every 2 or 3 years; however, citizens were not better housed because of policies associated with growing incomes and economic trends. From 1978-1997, the annual average salary rose from 672 Yuan to 11425 Yuan in Shanghai, a nearly tenfold
2increase, but the per capita building space in the urban area only increased 5 m, from
2224.5 m to 9.3 m, an annual increase of just 0.24 m. People in Shanghai still faced a
(Source from statistic shanghai)
In July 1998, the government decided to abolish the housing distribution system and adopted a market mechanism. From then on, the housing market in China and Shanghai entered a high development period, and at the same time, consumers have
officially faced the affordability problem.
Early in the 1990s, Shanghai became the city which with China’s fastest GDP per
capital growth rate, and its average income had a high and steady rate of increase. These characteristics brought about a large demand for housing. Investing in housing became a hot topic, and funds flowed into Shanghai’s housing market where supply
rose automatically. In 2004, 7 years after the housing market reform, the total production in the housing sector was 8.4% of the Shanghai’s GDP and became the
city’s third largest industry (the first two being IT and finance).
From graph 1-1, a vast increase in per capita building space occurred after 1998, when the standard of living in Shanghai improved dramatically because of the reformation of the housing market. The shortage problem had been eliminated. On the other hand, as the supply increased, housing prices did not go down. Inversely, housing prices actually went up about 70% (table 2-1). Most people could not afford their housing according to their budget and salary.
Price indices for real estate in Shanghai (2001-2007 take 2000=100)
(Source from statistic Shanghai
2001 2002 2003 2004 2005 2006 2007
Sales price indices 104 112.0 134.5 155.9 171.1 168.9 174.6
Commercialized 101.8 110.1 132.7 153.7 167.8 162.8 167.8
Residential buildings 102.1 111.0 132.7 153.7 171.1 168.9 174.6
Other buildings 98.3 102.0 114.0 132.3 143.6 141.6 144.6
pre-owned houses 110.8 117.1 142.4 167.3 185.1 188.4 195.6
In 2005, the Chinese central government proposed a number of affordable housing plans and policies. These policies were intended to improve the market and benefit the poor, but during the a few past years, these policies did not work well. In Shanghai, many still cannot afford the high housing prices. In 2008, the international financial crisis slowed the booming Chinese housing market. Prices started dropping at the beginning of 2008 and housing demand also declined nationwide. Until
2November 2008, the total transacted area was 490 million m, a decrease of 18.3%
from 2007; and total revenue of housing sales was 1926.1 billion Yuan, down 19.8% from 2007. Nevertheless, in some Chinese major cities, housing prices still increased. Even though the market situation is associated with a lack of confidence in future market and economic trends, the consumer enthusiasm for housing has not weakened in these cities. High prices, way beyond what the low-income consumer can afford,
keep many low-income consumers out of the market.
The first part of this paper will review the housing market in Shanghai and analyze the demand problem. The second part is an empirical investigation of whether there is an affordability problem. The third part will critique government policy and suggest possible action that could benefit low-income people.
Review of the Market
Since 2000, the persistent overheating of the housing market in Shanghai led the housing supply to increase dramatically. From 1998 to 2003, investment and floor completed commercial and residence space have doubled, and prices also ubstantially appreciated. The official statistics show that in 2000, the average price s
per square m was 3326 Yuan but by 2005, prices rose to 7054 Yuan per square m, an increase of 121%
Despite the government’s market cooling action, foreign investors continued to
pour billions of dollars into China’s property sector. In 2007, foreign direct investment
in the real estate sector rose by 108% to US$17 billion. This followed a year-to-year increase of 52% in 2006, according to the Ministry of Commerce. Domestic investment also increased at a high rate. In 2007, the total domestic investment in the real estate sector was 1938.2 billion Yuan, an increase of 21.8% over 2006.
The reason for Shanghai’s housing boom could be the large demand for housing
but it could also be due to over-investment and bubbles in market. To draw conclusions about the true cause, this paper will first examine demand.
The Demand Side
One reason for rapid growth in the housing market could be the newness of the market compared to other markets. Every year, the number of newly finished residences is relatively small for the increase in population. From 1998 to 2005 the
2accumulated total floor space completed was 174.84 million m, and this number was
equivalent to about 1.6 million commercial residences, with the average incremental
supply of about 20,000 residences. On the other hand, the population of Shanghai was 18.1508 million in 2006, and the average number in a family is 3.02; therefore, there are 6.05 million households, which means the increase in housing supply could not satisfy the huge housing demand.
Broadly speaking, the residences finished before 1998 were low quality, so nearly every family is a source of potential demand for new residences. For a newly developed housing market, the newest residences are bought by people who have the greatest purchasing power, so the price is relatively high (relative to people who have a normal level of purchasing power). Only a small group of people in Shanghai are in
the top economic tier and can afford new houses.
A “new” market means the market structure is not mature. A highly developed housing market should have a purchasing market and renting market of relatively equal weight. However in Shanghai, the renting market is not only immature but also quite small in size.
Overview of the Housing Market 2000-2007
Item 2000 2006 2007
Total transaction area of commercial residences 15578.7 30254.0 36949.6
(thousands square m )
Total revenue of commercial residences (billion Yuan) 55.545 217.708 308.935
Total renting area of renting residences (thousands square m) 592.9 786.3 1103.8
(Source from statistic Shanghai http://www.stats-sh.gov.cn/2003shtj/tjnj/nj08.htm?d1=2008tjnj/C1706.htm)
From the table above, we can observe that the total rental area is only about 3% of the total transaction area from purchasing. Although there exist a large number of renting businesses not covered in this statistic, it does show the rental market is not well regulated. Tenants can hardly protect their benefits by legislation and there is too much uncertainty in this market. In such circumstances, the direction of housing demand shifts to the purchasing market and consequently housing prices are kept at a high level.
Additionally, according to Chinese traditional thoughts and culture, to have one’s
own house is the standard of measuring if one is successful in society. For every young man in China, the ownership of a residence is a precondition of having a marriage. Renting is the last choice and is considered to present a lower social status. The traditional sense drives many potential consumers away from the rental market to the purchasing market.
Increase in income and expected income influence the willingness to invest in housing.
Annual average disposable income in Shanghai (2001-2007, unit price: Yuan)
(Source from “statistic Shanghai”
http://www.stats-sh.gov.cn/2003shtj/tjnj/nj08.htm?d1=2008tjnj/C0915.htm) Item Disposable Income from wages Net business Income from Income from
Income And salaries Income Properties Transfer
2001 12833 7975 119 39 4750
2002 13250 7915 436 94 4805
2003 14867 10097 377 130 4263
2004 16682 11422 507 214 4539
2005 20688 13962 798 300 5447
2006 20688 13962 959 300 5447
2007 23623 16598 1158 369 5498
From 2001 to 2007, the annual average disposable income in Shanghai rose from 12833 to 23623, up 84.8% if not counting inflation. The large increase in income and the expectation of higher future income both increase housing demand and housing prices.
At the same time, the urbanization and reconstruction of the old town also brought demand for housing. More people are coming to Shanghai. From 1998 to 2005, 350 thousand families moved to Shanghai. The standard of living and price level is relatively higher in Shanghai compared to other city in China, so people who decide to settle here must be rich with high purchasing power. Their coming is another factor increasing housing prices.
As both new and old residents now understand, housing is an investment. Before the
1998 the housing market reform, many did not realize that housing is also an investment commodity. After the housing market reform, the investment function of housing was gradually discovered. Once housing prices begin to increase, the sector will absorb many investors in a very short time, so the value as an investment becomes important. Furthermore, the depression in the stock market before 2001 and the relatively low risk in housing investment brought more demand into this market.
Lastly, since 2001, banks lowered the mortgage rate and down payment (to 20%; some banks offers 0 down-payment), and the longest maturity was broadened to 30 years. Such actions not only expanded the potential demand for housing but also
enhanced the financing means of investors.
Annual Saving and mortgage in Shanghai
Total consumer savingtotal housing mortgage
(Source from statistic Shanghai, annual report 2001-2007)
From the above graph, the annual saving rate and mortgage rate both have increased, which means that considerable funds entered the housing market. A high saving rate provided sufficient money to borrow to invest, and high mortgage rates indicated high demand in the market.
The Income/Price Analysis
There may be more reasons why housing prices and demand are at such high levels. However, to determine if there is an affordability problem, we should also examine consumer income and housing prices. Because people have different incomes and different purchasing power, it is necessary to divide consumers into