Analysis of the current high housing prices in China. and possible policies

Transcription

1 Division of Building and Real Estate Economics Department of Real Estate and Construction Management Royal Institute of Technology, Stockholm, Sweden Master of Science Thesis number 389 Analysis of the current high housing prices in China and possible policies Author: Li Xiaoling Supervisor: Hans Lind August 2007, Sweden 1

2 Master of Science Thesis Title: Analysis of the current high housing prices in China and possible policies Author: Li Xiaoling Department: Building and Real Estate Economics School of Architecture and the Built Environment Royal Institute of Technology, Stockholm, Sweden Master thesis number: 389 Supervisor: Professor Hans Lind Keywords: China, housing price, bubble, macro-policies Abstract From 1923 to 1926, real estate bubbles in Florida USA eventually lead to worldwide economic crisis in 1930 s. In 1990s Japan real estate bubbles burst and prevented Japan economy from stepping out of bubble shadow till today. In 1997 Asian financial crisis brought about by real estate bubbles give the whole world a huge hit. China housing prices also have surprised almost the whole world by increasing fairly fast and dramatically since 2004 in national scale. Many people fear that behind the high increasing housing prices, there are similar serious bubbles and fear that bubbles might burst sooner or later and bring disaster to China economy. The purpose of this thesis work is trying to analyze what are the factors that have pushed China housing prices to increase so fast and dramatically, and to figure out whether or not China housing market has already crossed the line between healthy growth and artificial prosperous bubble. Meanwhile, China government has made intensive efforts to moderate housing price hikes and cool down the overheated sector. In this thesis, the main policies and measures China government has taken are also going to be analyzed. It can t be denied that China housing prices have enough fundamental factors support, and also at a sudden glance it might seem very reasonable that high housing prices in China will last long because of the fast GDP increase, speedy urbanization process etc, yet the fact that in the long run China housing prices will have a trend of increasing does not necessarily mean in the short run there is no bubbles. Actually after deep analysis, we found there are real estate bubbles in China. A happy thing is that now the bubbles are not so big yet, but China government still has to pay great attention to it and take effective measures to control housing prices, so as to prevent bubbles from getting bigger and avoid the disaster when bubbles burst. We think housing prices in China should decrease for about 20-30%, and return to the housing price level before Only by squeezing away speculation capital, introducing more normal demand, can China housing market develop in a more stable and sustainable way. 2

3 Acknowledgement Firstly, I would like to thank Royal Institute of Technology (KTH) for giving me the opportunity to receive the advanced education here in Stockholm, to know the culture of Sweden and meet different classmates and friends from all over the world. Then I would like to express my sincerely and great thanks to my supervisor professor Hans Lind for his patient guidance encouragement and great help during my thesis work. His knowledge expertise perfect working attitude and sense of responsibility not only contributed invaluably to my thesis, but also made a very good example for my later career life. Also thank every other teacher for their excellent job and kind help during the process of my Master study. Thank them for their bright smile whenever I go to them for help. Thank my parents for their tremendous support and encouragement during my Master study and thesis work. Thank all my friends and the companies that contributed and shared their experiences and knowledge in this thesis. Last but not least, thank my husband Martin for his love and support during my study and thesis work. I love you all! Li Xiaoling August, 2007 in Stockholm 3

4 Table of contents Abstract...2 Acknowledgement Introduction Background Purpose Methodology Disposition Limitation China s current housing market situation China s housing system background Current situation in China s housing market Housing price theory: why housing prices in China are so high? Merchandise itself value Currency itself value RMB is considered undervalued Excess liquidity has caused inflation Market demand Chinese traditional attitude to housing People income increase very fast Huge potential demand because of the speedy urbanization process Huge practical demand since so many people want to improve housing Low interest rate have been imposed for a long time High deposit rate Limited investment ways Family structure is changing Huge wealth gap between the rich and the poor Real estate market is disordered and consumers are bounded rational Market supply Real estate has been treated as the pillar industry of national economy Unbalanced housing supply structure Wrong local government leading policies Bubble economy Definition Classification Why real estate can be the main carrier in bubble economy Prerequisite of bubble economy When bubble will burst

5 4.6 Bad effects that real estate bubbles bring about Are there real estate bubbles in China? Investment and speculation demand Three indexes to identify bubbles Housing price-to-income ratio Housing price-to-rent ratio Vacancy rate Macro-adjustment and policies Why real estate bubbles can easily exist in China? Purpose and necessity of government macro control Strengthen housing system, change housing structure Build more economic affordable houses Applied policy to improve the amount of small apartment Improve low rent housing market Improve second hand market Control land supply Strengthen tax system Shorten wealth gap between the poor and rich Strengthen legal system Marketization real estate development Increase information transparency Improve examination and check up system Strengthen financial system Tighten up bank loan Increase principal proportion Increase interest rate successively Strengthen credit control, increase proportion of developers own capital Control consumption credit Control international capital especially international hot money Stabilize RMB exchange rate Strengthen social security system Broaden investment ways Change expectations Final analysis and Conclusions...58 Reference...60 Appendix 1 Definitions...62 Appendix 2 Policy documents

6 1 Introduction 1.1 Background Since the reform and opening policy was carried out in 1978, China s economy has been developing at a dramatically fast speed. Especially after the housing reform was carried out in 1998, the welfare housing distribution 1 system which has last for more than 50 years in China housing market history has finally been abolished. Since then, China s real estate market began to form and real estate sector also began to be treated as one of the main pillar sectors in China s national economy. Through the past two decade from the reform and opening policy till now, every year China GDP has been increasing at a speed of about 10%. Social wealth has also kept increasing. All these have made solid base for China real estate sector s fast development. In recent years, especially since 2003, China housing price has been increasing very fast in national scale. There are a lot of reasons which can explain the fast increasing housing prices, including the development of China GDP and economy, the speedy urbanization process, government policy to stimulate and encourage domestic demand etc. All these factors have brought new energy to China real estate sector s development. However, if comparing the increase speed of China real estate sector with the increase speed of China economy and households income, we can see currently China real estate sector development speed has far exceeded the level which China economy and households income fast development can support. Unprecedented family debt is accompanying with the high housing prices. A case survey done by China National Statistic Bureau showed that current ratio between family debt and disposable income is 155% in Shanghai and 122% in Beijing. Yet even five years ago, very few Chinese families had any debt at all. In almost every city, housing prices are roaring. In certain cities like Shanghai and Beijing, housing prices are even higher for normal households to stand. The possibility of a "bubble" might exist in housing prices and the possible harm if bubble burst and housing prices collapse might bring about to the whole China economy therefore has aroused widespread concern and become a public topic. Though China s fast increasing GDP and urbanization process and other fundamental economic factors can show that the housing prices will keep increasing and have very good support in long run, but that does not mean that in the short run there are no bubbles in housing market. After making deep analysis and comparing China housing market with foreign market, we found there are bubbles in China housing market now. And at present, the bubbles are not so serious, mostly are just at the step of beginning to develop. China real estate sector needs soft landing. China housing market bubbles need to be prevented from getting bigger and bigger. In order to cool down the overheated real estate market, and make the whole society more in harmony and develop in a more sustainable way, China s government 1 More detailed explanation for welfare housing distribution can be found in Appendix 1 6

7 has put into practice a series of policies and measures including tightening control on the land and bank loans etc. More or less, these policies have some effects on controlling high housing prices. Although the prices continued to increase, the increases have decreased and the real estate market has been considered entering into a stage of adjustment. Since compared to other foreign countries, China real estate market is still on its beginning period of development, we believe that after the market become more matured and ordered, China housing prices are sure to follow a health way. 1.2 Purpose Housing prices in China s residential market is the main research subject of this thesis. Through this thesis we hope that people could know more clearly about the current situation of China housing market, and get a clearer idea of why currently housing prices in China could be so high. Also we hope the thesis could give them some more scientific instructions when judging if there are bubbles in China at present, and therefore they can keep alert to current housing situation. It is very important for the people to get the right idea of current situation, since it might change their behaviors and expectations when buying and selling apartment, which will greatly affect housing demand and supply. Moreover, by analyzing the macro policies and measures China government have taken to moderate housing prices and the policies limitations, we hope the thesis can have some positive influence on the public policy and help the authority to perfect the formulation of national real estate policies. Within the research capacity, the main research purposes can be summarized as the following four aspects: 1) introduce the current China housing market situation 2) reveal important reasons for the high housing prices 3) analyze if there are real estate bubbles 4) introduce the macro policies China government used to cool down real estate sector and those policies limitations 1.3 Methodology Method to collect data and information The main method used to collect data and related information is by using the internet, surfing a lot of websites for related E-newspaper, articles and E-journals, and refer to a lot of related former studies and research articles and books both in KTH library and Shanghai city library. A lot of statistical figures are collected from the homepage of China National Statistic Bureau and local government s homepage Method to analyze problems Both qualitative and quantitative methods are used to analyze problems in this thesis. The statistical and induction methods are mostly used when analyzing bubble phenomena. Empirical analysis and comparison analysis are also used in most discussion part of this thesis. 7

8 1.4 Disposition The thesis is begun by taking a general look at China s current housing market situation. We found there are overheated real estate investment and development in most of cities, and housing prices in most big cities are very high. Part 3 is the analysis of the reasons that can explain why China housing prices are so high. Some are fundamental economy factors, while some are speculation factors which are regarded worldwide as the origin of real estate bubbles. Part 4 and 5 explained a lot of general conceptions and theories about real estate bubbles, and then provides a series of standards that is often used internationally to tell if there are real estate bubbles in a housing market. By using those typical standards, the thesis made corresponding analysis to the housing prices in China residential market. Part 6 introduces a series of macro policies and measures which China government have taken to cool down the overheated real estate sector and moderate housing prices. Those policies reasons and limitations are also analyzed in this part. Part 7 presents the final discussion and conclusions. 1.5 Limitation This thesis was written by the early 2007, so the data collected and quoted and policies mentioned are only up to the end of New policies and changes might take place again in But in this thesis, new changes and updated macro policies published by government after Jan 2007 are not included. The data quoted in this thesis are mainly from China National Statistic Bureau website. Also this thesis focus on analyzing time period from 2003 to 2006, because Year 2003 is the beginning year that China housing market price began to increase dramatically in a big scale, and also since 2003 a lot of macro controls designed to adjust housing prices were published successively. There are different types of housing, but residential housing is the main force of China housing market and also in China nowadays, apartment takes up 90% of residential housing market. Therefore in this thesis, we only focus on commercial apartments 2. Lastly, though the thesis has tried to be objective, but since there are not so much quantity analysis in this thesis, instead the main analysis method used in the thesis is qualitative method. Because of the limitation of analysis method, the thesis will inevitably affected by some of my subjective view and opinions. 2 More detailed explanation for commercial apartments can be found in Appendix 1 8

9 2 China s current housing market situation 2.1 China s housing system background In 1949, nationalization started. Houses and land were nationalized when the People's Republic of China was established. To make China remain in harmony, government left some private houses ownership unchanged. In 1960, restrictions were loosened. China opened up to foreigners. And houses were provided almost for free to employees through State Owned Enterprises was a big year. A market emerged for commercial houses for foreigners with high incomes, and for non-state employees. Also, citizens could now hold and transfer legal rights to own buildings. Finally, mortgage loans were being offered through the China Construction Bank. In 1979, China began to carry out experimental housing unit in certain cities, to sell houses at full price. In 1982, China began to carry out experimental housing units that were sold out accompany with allowance. Government, State Owned Enterprises and employees each need to pay one third of housing prices was the next big year. The Chinese government started actively encouraging citizens to purchase their first house, either to purchase the welfare houses they were living at that time, or to purchase new-built welfare houses, at a nicely subsidized price nationally. Also, cities started providing lower-cost financing for workers who wanted public housing, through contribution and welfare housing funds. In June of 1995, the Chinese government established a housing reform program to help low-income and middle-class workers. The framework for collateral and for foreclosures was set into place. In 1998, new policies were introduced to help with housing reform. No more welfare housing would be built since then. The subsidized housing traditionally available to employees would be phased out. Employees were encouraged to buy their own houses with their own savings. China began to build up housing distribution capitalization and housing supply commercialization systems. Certain areas were set aside for housing for low-income households. Mortgage loans could now have a maximum loan value of 70%. Income verification was mandatory. 2.2 Current situation in China s housing market I work hard for a whole year, but my yearly salary can t even reach the increasing amount of an apartment within one or two months. This is a common complaint nowadays that can be heard from common people in China. Since 2003, China s housing price has kept increasing dramatically. Take one apartment in 9

10 Shanghai as example. This apartment was located in central city. In Oct 2001, the average selling price was 6000 yuan 3 per m2, in the end of 2002, the price has risen up to 7000 yuan per m2. In the end of 2003, the price jumped to yuan per m2. In the end of 2004, the price jumped further more to yuan per m2. And in Mar 2005, the price has jumped to yuan per m2. Within less than four years, the apartment selling price has increased 300%. This high and speedy growth rate is an epitome of Shanghai housing price change trend. According to report published by Beijing Construction Committee, in 2005, the average selling price was 6776 yuan per m2, which has a year on year increase of 1183 yuan per m2, and increasing rate was 21.2%. And this trend seems not to stop. Housing prices in big cities like Beijing, Shanghai and Shenzhen all still have about 30% year on year increase in Obviously, the phenomenon has spread trends. At first this happened just in big cities like Beijing and Shanghai and some big cities, and then broadcast to cover the whole country, and this has become the common people s huge pain. According to the data from China National Statistic Bureau, in the first half of 2006, housing price in Lanzhou has a year on year increase rate of 5.7%, in Huhehaote the increase rate was 14.9%. Since 2003, housing price in Chengdu has increased more than 100%, and there is a big gap between local people s income with too high housing prices. In April 2006, China National Statistic Bureau published another research result: after having investigated housing price and rent level in the main 35 cities in China, they found in the first quarter of 2006, average housing price in China has increased 9.8%, while in 2005 the increasing rate was about 8% and in 2004 the rate was 14.4%, which is the first time that housing price increase rate exceeds 10% and exceed household income increase rate, and also 10.6% point higher than the figure in According to an investigation carried out by China Central Bank (The Peoples Bank of China) at the end of 2005, about 53% people think current housing price is too high, among these 53 % people, there are 88% think housing price will continue to increase if no powerful macro control is imposed. 3 Normally, the exchange rate between SEK and RMB is almost 1:1, and the exchange rate between US dollars and RMB is around 1:8. E.g. on Jan 1 st 2007, 1 SEK=1.11yuan and 1dollar=7.73yuan 10

11 3 Housing price theory: why housing prices in China are so high? In recent years, especially after 2003, commercial housing price has been increasing dramatically in China. There are all kinds of reasons and factors that explain why housing price keep increasing so fast and so much. Some are reasonable, while some are not. In this part, we are going to analysis why current China housing prices can be so high. Factors that push merchandise price to rise: Under market economy, price level changes will follow certain rules. According to the Value Theory by Karl Marx, three factors will be the main determinant factors of the price changes: 1. Merchandise value 2. Currency value 3. Market supply and demand status for this merchandise. Housing price has been increasing in China nowadays are also the combination results of the above three factors effects Merchandise itself value China economy is developing at a very fast speed. According to the data from China National Statistic Bureau, China GDP average increasing rate per year during 1999 to 2005 is about 8.64%, and since 2002 GDP increasing rate has already been stabilized at a level of 10% per year. China average GDP per capita used to stay at the level of about 300 dollars since the beginning of 1980 until After innovation and open policies have been imposed since 1978, average GDP per capita reached 856 dollars in In 2003, the number increased more to 1100 dollars, which symbolized that China s economy has begun to step into a golden era of development. According to a report from China Central Bank, China GDP in 2005 is about 18 thousand billion yuan (=1,8* yuan). Compared with the GDP in 2004, the number has increased by 9.9%. GDP in 2006 is estimated to increase about 10.5%. CPI (Consumer Price Index) has increased by 1.4 % in 2006, and the number will increase to 2% in In the coming two to three years, China GDP will still keep at 8-10% increase rate. In future years, GDP per capita in China will breach 3000 dollars by estimation 5. Fast economy development and stable macro environment build up a great backup force for real estate development and houses, this kind of special merchandise value to increase. However, we must also notice that this golden development era might on the other hand mean that economic and social conflicts will be more obvious and complicated. Along with the economy development, resources consumed also increased, conflicts arise by resource limitations will be more obvious. Great changes also took place in social structure, especially along with the income and wealth differences expand, conflicts among different income groups will be more serious. All these 4 Chai, Qiang (2005), Several theoretical problem which affect housing price,journal of Beijing Institute of Civil Engineering and Architecture, 2005, Vol. 2 5 Figures here mainly come from two government website: China Central Government website and China National Statistic Bureau website 11

12 conflicts must be dealt with properly to keep sustainable economy development, otherwise, economy might stop developing for a long time, even worse, social turbulence might happen. Moreover, China s economic development to great extent relies on export and investment, which might also be very dangerous. This will be discussed in later chapters. According to the World Bank, when the average GDP per capita in a country reached 300 dollars, the country s real estate sector is at its beginning step. When average GDP reached dollars, real estate sector steps into fast-speed development period. When it reached dollars, real estate sector began to step into a stable increasing and development period. According to the data from China National Statistic Bureau, by the end of 2003, average GDP per capita in China has reached 1090 yuan, so theoretically real estate in China is at a fast speed development period. However, we should also notice that in China, average housing area per capita has reached 23.7 m2, which already equals to the level in medium and high-income countries. But actually by 2005, China average income per capita has just reached 1000 dollars, which is at the medium and low level among the world. Therefore there must be something needed to be analyzed since Chinese have the medium and low-income among the world, but have the average housing area per capita that equals to the level in medium and high-income countries 6. Also, we think the following questions have to be concerned: First of all, can current GDP increasing rate keep to stay at a high level forever without any doubt? The real situation might not be so optimistic. It s true that nowadays China GDP increase extremely fast. But China economy development mainly relies on export and investment while domestic demand is not enough. Along with RMB appreciation and other policies, unbalanced international trading will be changed sooner or later. Also, a lot of policies have been carried out to cure overheated real estate investment. So if both export and investment will be set a limitation, how can the current GDP increasing rate still stay at the current high level? Secondly, nobody knows the future. Now China s economy development environment rely mostly on the stable political environment. But if there are any reasons that affect the current stable political environment in the future, it will not be too hard to imagine what is going to happen to China economy and housing prices. 3.2 Currency itself value RMB is considered undervalued. One of the main reasons for high housing price is that the RMB exchange rate has been undervalued, which attract a lot of international capital and hot money 7 to rush into China s real estate sector to invest or speculate, thus increasing illusive demand for housing and help to increase housing price. 6 Xu, D. Q. (2006), Housing price and bubble economy : China Machine Press 7 More details about the meaning of hot money can be found in Appendix 1 12

13 Exchange rate actually refers to the price of all commodities and assets in a country relative to other countries. When RMB is undervalued, it is no difference that China sent out an all assets prices are low here invitation card to other countries investors. Heated investments are easily to be brought about by expectation for RMB appreciations. Currency appreciation expectation will directly cause all assets price that is measured by this kind of currency to increase also. Nowadays transactions of new built houses and second hand houses are both quite active, and the housing price kept increasing. Behind the strong demand, foreign people purchasing form a very powerful team. A lot of foreigners even bought several houses at the same time. According to the data from Shanghai Statistic Bureau, within 2004, among the foreigner companies or individuals who have bought houses, 13% of those people actually had more than 5 sets of houses in Shanghai. Within the same year of 2004, almost 20% of the houses have been transferred, which make speculation phenomena more and more obvious, since in international real estate investment, exchange rate fluctuation will dramatically affect investors profits. Imagine a foreigner that bought a house in China at a certain price, some time later when he try to sell the house, if the house price has been increased, but if RMB depreciated at the same time, then housing appreciation will offset RMB depreciation, thus lead to investment failure. On the contrary, if RMB appreciated, even if the housing did not appreciate, the person will also gain profits by selling the house and exchange the RMB into foreign currency. So when there is an expectation that one country s currency will appreciate, there will always be a phenomenon that all kinds of international capital rush into this country and invest in real estate which is a not so risky investment project 8. Since 2000, RMB currency value has been undervalued for about 7% to 25% if calculating by nominal effective exchange rate. In July 21 st 2005, China RMB appreciated for 2%, but this little percentage is not big enough to eliminate the expectations for further more appreciations. Fang gang, the superintendent of China national economy institute pointed out that RMB should appreciate for 3-4% point each year so as to alleviate international trading surplus balance. By estimation, RMB in the future several years will continue to appreciate by 30%, a lot of excess capital will push assets price to increase dramatically. Relative low assets value because of undervalued RMB and expectation for RMB appreciation makes international hot money keep flowing into China to arbitrage or speculate. At the same time, inflow of new hot money put more pressure on RMB appreciation in the future. Only when RMB appreciation level is big enough to kill more expectation for further appreciation, will speculation capital leave China s housing market, which is very benefit for squeezing the real estate bubbles and help moderate housing prices. So if RMB appreciation expectation is really part of the reason that caused bubbles in China housing market, China government should appreciate RMB as soon as possible and the level should be huge enough to kill more RMB appreciation expectations. 8 Huang,Yichao (2005), Develop the visual economy to enhance the ability against the hits by international shifting capitals, Journal of Xinjiang Normal University, 2005, Vol. 2 13

14 3.2.2 Excess liquidity has caused inflation. Excess liquidity is a kind of monetary phenomenon, and means that there is too much currency in a market. According to the European Central Bank, excess liquidity is defined as that the real currency stock deviate from expected equilibrium level 9. As we have just discussed above, the pressure that RMB will appreciate makes all kinds of foreign capital rushed into China by all means. How much international hot money has rushed into China? A popular saying is that about 300 to 500 hundred million dollars have rushed into China to bet RMB appreciation and to gain exchange profits. Some people think this figure is not so accurate, but anyway the accurate scale is not the point, the point here is it is the truth that international hot money has indeed rushed into China on a very huge scale, and this make the excess liquidity situation became even worse. To cure the problem of excess liquidity, it is vital to control RMB appreciation speculation first. The biggest risk that excess currency liquidity might bring about is inflation. Up to today, the ratio of M2 / GDP in China already reached 1.85 according to the data from China National Statistic Bureau. Normal consumptions prices including housing prices are all consistently increasing in a wide range. However, the main reason that helped China from stepping into deeper inflation cycle was that manufacturing sector expanded much more and much faster than the expending of currency supply Market demand Chinese traditional attitude to housing In May 2006, China Central Bank published an announcement, saying that after spot-checking 10 cities in China including Beijing, Shanghai, Tianjing etc, they found more households prefer to buying houses instead of renting. Among the ten cities being investigated, about 62% households even never think about renting houses. While in Beijing, the percentage was as high as 90%. Why is that? Firstly, rental houses are not so well equipped, can t give people the sense of security and ascription. Also rental houses give tenants not so much freedom. For instance, they can t decorate the houses as much as they want. Moreover, rental houses are not so cheap as well and rental market has always been disordered. However, the most important underlying reason is Chinese traditional way of thinking. Chinese people think they should buy and have their own houses instead of renting other people s house to live. But actually it is very dangerous that all the people want to buy houses. It will cause housing demand being exaggerated and push housing price to rise. 9 Guang, Qingyou (2006), Only one step between excess liquidity and inflation, Journal of Hainan Finance, 2006, Vol Li, Hongkun (2005), Effect of Hot Money Inflow and the Prevention Policies,Journal of Statistical Research, 2005, Vol

15 3.3.2 People income increase very fast Household income level has kept increasing, thus people have stronger desire to improve their living conditions. After China joined WTO in 2001, within these 5 years, Chinese people s living standard has increased dramatically. According to the data from China National Statistic Bureau, during 1999 to 2005, urban household disposable income increasing rate was about 10.83% per year, while after 2001 the increasing rate has all exceed 11%, and urban household s average monthly monetary income per capita used to be only 63.5 yuan in 1980, and 226 yuan in But according to the latest statistic data in July 2006, this figure has increased to yuan and in Oct 2006, this figure has increased more to yuan. In Beijing, this figure in Oct 2006 has reached yuan, which is the highest in China, followed by Shanghai, whose household s average monthly monetary salary per capita is only 9.56 yuan less than in Beijing. And in Oct 2006, in the aspect of the disposable income, Beijing was yuan, which is the second highest in China, while Shanghai was yuan, which is the highest in China. Urban household s average monthly monetary income per capita in Zhejiang province in Oct 2006 was yuan and the disposable income per month per capita was yuan, both help Zhejiang to locate in the third place of China. There are some other provinces in which the average monthly income per capita has exceeded 1000 yuan, such like Jiangsu, Fujian, Tianjin and Shangdong. However, we must notice that even though people income has been increasing at a very fast speed nationally, yet the income increasing speed is still lower than housing price increasing speed. Take Shanghai as example. According to the data above, Shanghai could be considered the richest city in China, but compared the average disposable monthly income per capita of yuan with the current average high housing price of 7000 yuan per square meter, it is still a dream for the average people to buy houses. In most cities of China, the middle and upper class households can t afford to buy houses considering so high housing prices and relatively low income. For those who bought houses, most of them have to take on a heavy debt burden to pay the bank mortgage back every month. The willingness to give bank mortgage loan money back is based on optimistic expectation for future income, yet once their income decreased or future income can t really reach their expectation, there might be a huge systematic risk for the banks. And that will definitely bring disaster to the whole society. This will be discussed more in later chapters Huge potential demand because of the speedy urbanization process China urbanization process is speeding up. New comers into the city also bring huge new demand for housing. Meanwhile, the combination of the long construction cycle and the construction lag make supply increase not fast enough to meet demand in time. At the present, China urbanization level is about 40%, there are about 5.1 hundred million people in town and cities. By estimation, China urbanization level will properly reach 55% by year of 2020, and there will be about 600 million rural people rush into cities. By then, urban population in China will be about 900 million. If this is true, every year there will be 40 million rural populations moving to cities from rural areas. If per person needs 10m 2 place to live, then every 15

16 year China needs to build 400 million m2 new apartments. Also in China, there are about 1 hundred million m2 housing needs to be removed down and rebuilt. Till 2020, at least 580 million m2 new housing needs to be built every year. China real estate market has huge potential demand for sustainable development 11. However, we have to admit that even urbanization speed is very fast, and it is reasonable for housing price to increase due to increasing demand, yet it is not reasonable that housing price has kept increasing too quickly and too dramatically in short period, and housing price in some cities has reached a too unreasonable level. Take Beijing and Shanghai such big cities with most fast urbanization process as example. According to the data from China National Statistic Bureau, in the year of 2004, the population in Beijing and Shanghai only increased for 370 thousand and 310 thousand respectively, with the population increase rate of 2.54% and 1.81% respectively, among which the population natural increasing rate was 0.07% and almost zero respectively. Under such urbanization circumstances, the current too fast housing price increasing rate was thought to be unreasonable, because in 2004, also according to the data from China National Statistic Bureau, national housing price increase rate has reached 14.4%, and the housing price increase rate in Beijing and Shanghai has even worse reached 27.5% and 23% respectively. Huge potential demand in the future can t fully explain why current housing prices can already be so high now. Demand caused by urbanization is a kind of future potential demand in the long-term; it won t be released in short period and can absolutely be solved by market step by step. Actually we think quite the contrary, too high housing price is not a result of speedy urbanization process, but actually is a balk that destroy and affect China urbanization process. Though there are lots of peasants waiting to move into town and cities, and the current urbanization process in China is quite fast, yet given so high housing price and so low peasants income currently, it is really a dream for peasants to be able to afford houses in cities 12. According to the investigation data from China Ministry of Agriculture, in the first half of year 2005, peasants yearly cash income per capita was 1586 yuan, while in 2004, China average commercial housing prices have already reached 2777 yuan per square meter. Considering the fast increasing rate of housing price in 2005, a peasant s yearly income can only afford half square meter. And in the short run, there is little possibility that current peasants incomes can be increased a lot. Since in China labor market, there is more labor supply than demand, which decided labor salary couldn t increase dramatically within short time. In this sense, China urbanization is not a reason for housing price to keep increasing, but actually a drive power to push housing price to drop down urgently. 11 Niu Fengrui (2005): Rural Modernization and Urbanization in China. 12 Xu, Jingyong (2002), Practical Thought on Rural Population Urbanization, Journal of Fujian Provincial Committee Party School of CPC,2002, vol.10 16

17 3.3.4 Huge practical demand since so many people want to improve housing The houses Chinese people are living now can be divided into 4 kinds 13 : 1. Inheritance privately-owned houses that are left till today from previous years before President Mao liberate China; 2. Reformed public houses (or welfare houses, but during housing reform, people have bought them at a subsidized price and got ownership); 3. Commercial houses 4. Economy affordable houses Although these years the development of commercial houses and economy affordable houses have increased a lot, yet their total amount still can t reach the amount of welfare houses that have accumulated in the first 50 years since People's Republic of China was established. According to the data from China National Statistic Bureau, by the end of 2003, there are about 8 billion square meters welfare houses in China, which took up 67.54% of the total amount of houses nationally. In different cities, situation might have little difference, yet in national scale welfare houses at least took up more than half of the total amount of houses. By 2005, among the families who own houses, private houses took up 9%, commercial houses and economic affordable houses 14 took up 37.3%, and welfare houses took up 53.7%. However, most reformed public houses are quite old now with not so good equipment. The housing types are also quite small and uncomfortable. People who now live in these houses also want to improve their living condition and move into the new commercial houses. Demolishing scale is expanding, passive demand also speed up. Along with the process of urbanization, more old houses are demolished and new houses are built. Although after the National Six measures were carried out, in 2006 urban house removing scale has decreased a bit, yet passive demand for houses because of urban house removing are still quite huge, and this also push housing price to increase. At present, China average living space per capita in cities is about 13.6 m2. Compared with the number in developed countries, the number in China is still very low. For instance, in USA average living space per capita was about 40 m2, in Germany it was 38 m2, 31 m2 in Japan, 30 m2 in Singapore and 28 m2 in Taiwan province. There are now about 5 hundred million people in cities. By estimation, in 2020, urban population will reach 7.7 hundred million, if per person needs to increase living space for 4 m2, then about 30 hundred million m2 will be needed Low interest rate have been imposed for a long time In the long run, low interest rate in banks has big responsibility for high housing prices. No matter real estate investment or consumption opportunity costs, or the effective demand for housing, no matter housing price level, or housing price changes, all of them are concerned with interest rate. When interest rate is low, housing price will increase; and vise versa. Low interest rate will decrease developers investment costs which will not necessarily push housing price to drop, but 13 This information comes from the China Construction Ministry website 14 More detailed information about economic affordable house can be found in Appendix 1 15 Niu Fengrui (2005): Rural Modernization and Urbanization in China. 17

18 at the same time, decreased interest rate will decrease people s purchasing costs, and this will stimulate more demand for housing. Easily to get a loan, plus low interest rate help the growth of huge amount of housing slaves. When there is increasing demand for housing, housing price will definitely increase. Since 1998, China has decreased interest rate eight times successively, which already made the current nominal interest rate reach the lowest point in history. On the other hand, increasing housing price also made real estate a very good choice for household to keep wealth and make wealth appreciation. Since housing price has kept increasing, banks are also willing to provide loans including mortgage loan to consumers and development loans to developers with very favorable terms. Thus more and more capital is flowing into real estate sector, which furthermore stimulate overheated real estate development and encourage housing price to increase more. In recent years, China housing loan market has increased dramatically. In 1998, housing loan provided by banks is about 426 hundred million yuan, while in 2005, the number is 4910 billion yuan. Within 7 years, housing loan provided by banks has increased 115 times. By the end of 2005, housing loan already occupied 10% of national GDP 16. In Dec 11 th 2006, BIS (Bank for International Settlements) published quarterly report, saying that China housing loan has reached 2270 hundred million dollars and the scale is so huge and make China listed in first place of Asian countries. This phenomenon is very dangerous, since financial disaster might be brought about. But under the temptation of huge profits, banks tend to ignore the horror behind. Since the end of 2004, government had increased interest rate three times, trying to control high housing price. This will be discussed furthermore in the later chapters High deposit rate China is the country that is famous for having the highest household deposit rate of the world at present. According to the data from European Union Committee in 2005, household deposit rate in America, Japan and European Union Committee were only 4%, 11.5% and 11.1% respectively. While according to data from China National Statistic Bureau, the rate has been above 35 % in recent 20 years, and the peak in history was 46%. Urban household deposit money has doubled within 4 years since According to China Central Bank, till the end of Dec 2005, urban household deposit break through 14 trillion yuan, while this figure used to be only 7 trillion in Till Mar 2006, the number has reached 16 trillion yuan. On the other hand, China household consumption rate has kept decreasing in recent 5 years. Within the recent 10 years, China average consumption rate was 59.5%, which was 20 percent point lower than international average level. Why is current deposit rate so high? There are several main factors that affect households savings rate, includes households income increase, population age structure in society, relative CPI, 16 Lu, Huimin and Mei, Sen (2004), The analysis of real estate financing channels, Journal of construction management modernization 2004, vol.5 18

19 interest rate, inflation rate etc. Also high deposit rate has something to do with China traditional culture of saving, family conception etc. here we mainly analyze the following two aspects: 1. Imperfect social security system: According to the investigation carried out by China Central Bank in 2005, currently household s purpose to save money in turn are for children education fees, provided for the aged, medical treatment, buy houses and decorations respectively. To low-income households, since the lack of perfect social security system, even if they have got some money, they will still control consumption. To middle-income households, everyday consumption needs already have been met, new luxurious consumption have not yet formed, plus high housing price and high education fees, this part of household more tend to deposit money. To high-income households, big part of their income was used to invest, but due to limited investment methods, these households have to deposit money in banks or invest in real estate sector. 2. Current income and expected long-term income in the future. Uncertainty about future income and other factors make households tend to deposit in huge scale. Currently, high percentage of the population in China is workers. Old-aged retired population is not so big. Since people can t know exactly the future income and consumption when they are young, so expected future income and consumption will affect consumption plans. Also China used to be a quite poor country. The households who are just getting rid of poverty since new China was established in 1949 are content with the increase of living standard. Even now when their income can support them to live in a very high standard or luxurious life, inertia effect still push them to keep the original consumption habits, or only consume part of their income, while the rest are deposited in banks just in case. Lots of Chinese still have the memories of old poor China. They tend to deposit to prevent from stepping into poverty one day again in the future. Why high deposit rate is also a reason for high housing prices? At a first glance, people are easily to think that more deposit in banks is a good thing, since everyone deposits money in banks so that they won t use the money to buy houses or speculate houses, thus can lower the demand for housing, and draw housing prices down. Yet the case is not that simple. High deposit rate also contribute to high housing prices. The reason can be illustrated in the following aspects which every aspect connected with each other: 1. High deposit rate helps lead to overheated real estate investment. Huge amount of savings in banks forced banks to increase loan to make profits, and in order to have more loans out, some banks loose the credit condition checking, thus bad account or bad debt loss occurred, which is very dangerous and easily lead to financial disaster. High deposit ensured there is always enough money in banks for real estate developers to borrow as development loans. Also Since interest rate has been stayed at a low level for a long time, so costs for loans are very cheap. Once developers have successive inflow of capital, their development scale will become bigger and bigger, which partly explained why real estate development could be overheated for so many years. Since in China, normally only 30% of the 19

20 development capital was developers self-owning capital, the rest 70% are from the bank loan. Only if there are enough capital keep flowing into banks, banks will have stable financial support, and the capital chain of banks will not break. However, high deposit rate can t be long lasting. There are sure to be one day the deposit rate will decrease. And once the capital support is not enough, financial disaster will be the most dangerous thing. Also since Dec 2006, foreign banks began to have the right to deal with RMB deposit business, and this will more or less diffluent RMB in China national commercial banks, and make financial disaster more possible. So it is important to catch time to carry out financial sector innovation before the high deposit rate disappears to prevent financial disasters. 2. High deposit rate is considered one of the main reasons for unbalanced economy development structure. China s economic development rely so much on export and investment, while domestic consumption is so low since 40% of the income have been deposited in banks. Because of high housing price, Chinese people s enthusiasm to consume was destroyed. All the people have to save money trying to afford houses. Insufficient domestic consumption will put pressure on more export, while more export will put more pressure on RMB appreciation. RMB appreciation expectation will attract more foreign capital to rush into China housing market to speculate and push housing prices to roaring more, and this will go round and round in a cycle. In this sense, encourage domestic consumption, and lower deposit rate will be a matter concerned about whole national economy stabilization Limited investment ways In Dec 2005, China Central Bank published an investigation result, which showed that although almost all the people think current interest rate level is quite low, yet households willingness to save up money and deposit in banks are still increasing. According to the data from China National Statistic Bureau, currently about 39.5% of the households think it is better to deposit under the current given CPI and interest rate level. To great extent, one of the main reasons for increasing willingness to deposit when interest level was thought to be very low in national scale is that current China has very limited investment alternatives. In recent years, both China stock market and future market are not so stable and profitable, limited investment ways make all excess capital rush into real estate sector to pursue high profits. Stock market used to be very hot in China, but the high fluctuation in stock market also make medium and small investors loose faith in stocks and change to real estate investment, a kind of investment which is considered relatively more safe and stable. According to the same investigation result done by China National Statistic Bureau, only 5.1% of households think it is wise to invest in stocks nowadays. On the other hand, China national bond has limited supply, which can t meet all the needs. Under such circumstances, normal households have to deposit money in banks passively, while rich people will use the excess deposit to invest in or speculate real estate, and both help push housing price to increase more. We think China government has to do something to cure the situation, provide some methods to 20