Chinas Housing Development Strategy in the New Normal

Ting SHAO

Development Research Center of the State of Council, China (DRC)

2016-1-13

China’s Housing Development Strategy in NEW NORMAL

Main content �  Evolution path

�  Challenges

�  Policy evaluation and reform

Part 1: Evolution path

Database: Wenjing Deng et al, Urban Housing Policy Review of China, OTB working paper,2015-01

Housing tenure distribution

Database: Wenjing Deng etal, Urban Housing Policy Review of China, OTB working paper,2015-01

Housing condition improves quickly

32.91

37.09

0

5

10

15

20

25

30

35

40

1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Average Housing Area per Capita, in square meters

Urban(square meters per person) Rural(square meters per person)

Database: National Bureau of Statistics of China

Housing sector is crucial to China

6.00%

25.60%

17.90%

0%

5%

10%

15%

20%

25%

30% 20

05-0

3

2005

-07

2005

-11

2006

-03

2006

-07

2006

-11

2007

-03

2007

-07

2007

-11

2008

-03

2008

-07

2008

-11

2009

-03

2009

-07

2009

-11

2010

-03

2010

-07

2010

-11

2011

-03

2011

-07

2011

-11

2012

-03

2012

-07

2012

-11

2013

-03

2013

-07

2013

-11

2014

-03

2014

-07

2014

-11

2015

-03

2015

-07

ratio of real estate value added to GDP ratio of real estate investment to gross fixed investment


If we consider linkage with upstream and downstream industries, real estate is even more important If real estate(include construction) sector declines by 10%, then…

Database：Working paper of PBOC, 2015

But housing sector is slowing down in recent years

-20%

-10%

0%

10%

20%

30%

40%

50%

floor space under construction floor space started floor space completed


In percent, Quarter-on- Quarter

Real estate investment growth is dragging down GDP growth rate

14.2%

6.9%

13.71%

16.15%

33.16%

10.49%

2.6%

0%

5%

10%

15%

20%

25%

30%

35%

0%

2%

4%

6%

8%

10%

12%

14%

16%

GDP growth rate Real estate investment growth rate(right)


Part 2: Challenge

�  On the surface: � Overcapacity and Overprice

�  Underlying challenge: �  Local governments over-reliance on housing sector � Demographic change � Decelerating urbanization rate

Database: National Bureau of Statistics of China Note: Inventory ratio=floor space unsold/floor space sold (month)

621.69

696.37

1.38

8.08

4.9

0

100

200

300

400

500

600

700

800

0

1

2

3

4

5

6

7

8

9

floor space unsold(million square meters,right) Real estate Inventory ratio（month,left)

Linear (Real estate Inventory ratio（month,left))

The no. of months it takes to sell all inventory housing is steadily increasing

Potential housing supplies will worsen the problem even further…

�  Floor space under construction still large �  By November 2015, floor space under construction reached 7.2

billion sq. m. �  In contrast, the total floor space sold from January to November 2015

was 1.1 billion sq. m. �  At this speed, it will take around 6 years to fully absorb this amount

�  Significant amount of undeveloped land area �  By November 2015, land area purchased by developers but not yet

developed reached about 0.2 billion sq. m. �  …which will translate to 0.6 billion sq. m. in housing supply,

assuming 1:3 floor area ratio

The no. of years it takes to sell all existing AND future inventory housing is rapidly increasing

Database: National Bureau of Statistics of China Note: Inventory ratio=（floor space unsold+floor space under construction）/floor space sold (year)

3.6

6.5

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014

Year

Database: National Bureau of Statistics of China Note: only includes newly developed houses Tier 1 cities: Beijing, Shanghai, Guangzhou, Shenzhen

Price divergence among cities: prices in Tier 1 cities more resilient

-10%

-5%

0%

5%

10%

15%

20%

25%

Tier I Tier II Tier III/IV 70 large and medium cites

In percent, Month-on-Month

Yardstick #1: Ratio of house price to income

165.4

51.3

94

68.6

40

60

80

100

120

140

160

180

1970

.Q1

1971

.Q1

1972

.Q1

1973

.Q1

1974

.Q1

1975

.Q1

1976

.Q1

1977

.Q1

1978

.Q1

1979

.Q1

1980

.Q1

1981

.Q1

1982

.Q1

1983

.Q1

1984

.Q1

1985

.Q1

1986

.Q1

1987

.Q1

1988

.Q1

1989

.Q1

1990

.Q1

1991

.Q1

1992

.Q1

1993

.Q1

1994

.Q1

1995

.Q1

1996

.Q1

1997

.Q1

1998

.Q1

1999

.Q1

2000

.Q1

2001

.Q1

2002

.Q1

2003

.Q1

2004

.Q1

2005

.Q1

2006

.Q1

2007

.Q1

2008

.Q1

2009

.Q1

2010

.Q1

2011

.Q1

2012

.Q1

2013

.Q1

2014

.Q1

2015

.Q1

China USA Japan

To make data comparable across countries, we index long-term average of house price/income ratio=100

Database: The Economist; OECD Note: income per person after tax

Why is China’s house price/income ratio dropping? Because Tier I cities are actually outliers – house prices in most cities are affordable

Shen zhen

Bei Jing

Shang hai

y = 0.5386x - 4622.3 R² = 0.46472

-

5,000

10,000

15,000

20,000

25,000

30,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

New

Hou

sing

Uni

t Pri

ce (R

MB/

sq m

)

Per Capita Disposable Income (RMB)


Yardstick #2: Ratio of house price to rent

132.2

141.5 144.8

50

70

90

110

130

150

170

1970.Q1 1980.Q1 1990.Q1 2000.Q1 2010.Q1

China USA Japan

To make data comparable across countries, we index long-term average of house price/rent ratio=100

Database: The Economist; OECD; ONS; Standard &Poor; Thomson Reuters

Gross Rental yields in china is much lower

Database: Global property Guide, www.globalpropertyguide.com/Asia/rent-yields.

Underlying Challenges:

�  Strong incentive for local governments to boost housing sector too much

�  Demographic change

�  Decelerating urbanization

Fiscal arrangement: Imbalance between revenue and spending responsibility in local governments

22.02

77.98

28.27

71.74

45.95

54.05

14.87

85.13

0

10

20

30

40

50

60

70

80

90

Ratio of Central gov's revenue Ratio of Local govs' revenue Ratio of central gov's spending Ratio of Local govs' spending

1993 2014


Local government relies on real estate too much

2.44%

9.19%

75.9%

64.32%

0%

10%

20%

30%

40%

50%

60%

70%

80%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

real estate tax deed tax land leasing revenue

In percent, Ratio of local government’s revenue


Local governments restrict residential land supply

0.41

0.24

0.41

0.25

0.18

0.51

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Industry real estate Infrastructure and others


Cheap industrialization, expensive urbanization

y = 0.5856x - 9587 R² = 0.39077

y = 0.0351x - 234.33 R² = 0.30257

-5,000

-

5,000

10,000

15,000

20,000

25,000

30,000

10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Land

Pirc

e (R

MB/

sq m

)

Per Capita Disposible Income (RMB)

Residential Land Price Industrial Land Price


100 cities, 2013

Demographic change 2010 housing census showed 25-39 age group mostly likely to buy a house

26.92

22.34

23.4

70.4

74.4

73.41

68

69

70

71

72

73

74

75

20

21

22

23

24

25

26

27

28

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Age:25-39(left) Age:15-64


In percent, ratio of urban population

Boosting urbanization rate will not offset aging population, although the effect of new “two-child” policy remains to be seen

1.61

1.04

0

5

10

15

20

25

30

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

1978

1979

1980

1981

1982

1983

1984

1985

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1987

1988

1989

1990

1991

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1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Increase of urban residents(million,right) Increase of urbanization rate(%)


Migrant workers move to cities at decreasing rate

3.40

0.00

-4

-3

-2

-1

0

1

2

3

4

155

160

165

170

175

180

Peasant workers(million,left) growth rate(%,quarter-to-quarter)


Part 3: Policy evaluation and reform

�  Sensitive to financial conditions

�  Land supply matters

�  Property tax pilot: no effect on housing market

�  Affordable housing have goods and concerns

Sensitive to financial condition

-5%

0%

5%

10%

15%

20%

25%

30%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

growth rate of residential housing price

oct.2004,27 bp increase of interest rate

march,2005,down payment ratio from 20% to 30%

April and August, 2006,54 bp increase

april, increase loan rate for two houses

sep,2005,(ghten Housing trust 108 bp increase

down payment 50%

march to may ,increase requirement rate 150 BP

sep,oct, reduce 81 BP, downpayment is 20%

Jan,increase the loan rate and down payment

Nov, reduce 40 bp loan rate

Jan, down payment over 40%


E.g. Accumulation effect of interest rate change

　 2014 2015

House Price 300,000 341,785

30 year fixed mortgage rate 5.00% 3.60%

Total interest payment(30 years) 232,500 190,716

Yearly principal repayment 10,000 11,393

Total house price(principal repayment+interest costs) 532,500 532,500

Land supply matters

-60%

-40%

-20%

0%

20%

40%

60%

80%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

growth rate of housing land supply

growth rate of housing price（one year lagged，right）


Initial result of property tax pilot reform

�  Local experiments in Shanghai and Chongqing since Jan. 2011: little progress

�  In 2014, Chongqing raised the threshold of luxury housing tax for the third time to 13192 RMB/square

Share of real estate tax in Chongqing’s revenue is less than 2%. �  In 2014, shanghai collected real estate tax 10 billion RMB. If

exclude commercial，business housing, residential housing tax is less than 1 billion RMB.

Affordable houses developed quickly

34.5

47.5

71.8

55.8

45.3

51.8 53.8

0

10

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60

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0

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2009 2010 2011 2012 2013 2014 2015*

new construction of affordable house(million units) new construction of house(million units) ratio(%,right)


�  In 2010, 9% of urban households whose floor space per capita is less

than 8 squares, while in average is 29 squares per capita.

�  In 2010, China initiative a massive package of affordable housing construction.

�  2011-2015,plan to construct 36 million affordable house units. Until 2015.Q3, have constructed 39.15 million unites.

�  2015-2018, plan to renovation 18 million units of dilapidated buildings of various types, including urban shanty towns, villages and 10.6 million dilapidated rural houses

Affordable housing enjoys special treatment �  Land are free or low-price and have a priority in allocation

�  Cheap and easy money: China Development Bank gives the lowest lending interest rate

�  Huge subsidies from central and local government

Concerns �  How to give a reliable source of revenue to local governments? �  For cities that are facing overcapacity problem, building more

affordable housing will further worsen the situation.

Reform Strategy

�  Stabilize housing financial condition �  Increase down payment rate when interest rate decreases and vice versa

�  Promote real estate securitization: mortgage-backed securities and Real Estate Investment Trust (REITs)

�  Grant migrant workers full disposable right to rural land and homestead �  more asset-based income to buy house in cities

�  Promote property tax to become main revenue source of local government

�  Local governments transfer ownership of affordable houses to residents �  Provide revenue and relieve fiscal pressure on local governments

�  Local governments buy unsold commercial housing and sell to medium- and low-income families at discounted price

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Chinas Housing Development Strategy in the New Normal

Economy & Finance

Transcript of Chinas Housing Development Strategy in the New Normal