By Dominic Chiu

The Chinese government is facing a battle on two fronts when it comes to the real estate market. Housing prices have doubled—or tripled—in Tier I cities since 2015 due to increased investments brought about by economic uncertainty.

Wang Jianlin, the richest man in China, called the rise in housing prices “the biggest bubble in Chinese history.”

Furthermore, an oversupply of housing in third and fourth-tier cities has been a perennial problem since the phenomenon of “ghost cities” was brought to attention.

Suppressing rising property prices is a common theme through President Xi Jinping’s speeches, the Ministry of Housing and Rural-Urban Development’s (MOHURD) policies, and Central Commission for Discipline Inspection (CCDI) campaigns. The state’s anti-corruption apparatus will continue to be deployed in tandem with Xi’s supply-side policies to reduce excess housing in small cities and deflate the housing bubble in large cities. To anticipate government policy on real estate in the near future, it is important to keep track of political developments and personnel shifts within the government, particularly conclusions from the sixth plenum of the 18th Party Congress this month and the opening of the 19th Party Congress next fall.

Origins of the Housing Bubble

Since last year, the government has attempted to reduce housing oversupply by implementing nationwide policies incentivizing households to purchase property. For example, the People’s Bank of China (PBOC) reduced down payment requirements on property purchases across most cities back in February 2016. Housing oversupply became “one of the five main missions for structural reform” as announced at the 2015 Central Economic Work Conference. Local governments heeded this priority by reducing taxes, increasing property subsidies, and encouraging rural residents to purchase houses; in early March 2016, Shenyang even allowed high school graduates to purchase property without any down payment requirements.

The uncertainty due to the economic downturn turned retail investors to real estate as a perceived safe haven for a decelerating economy. A large portion of capital that fled the stock market since the crisis in mid-2015 also went into the property market. As a result, the country saw rapid increases of loans flowing into the real estate market, raising housing prices and debt levels to dangerously high levels. For example, the National Bureau of Statistics (NBS) reported that housing prices rose for 60 out of 70 large to medium cities in July and August. 528 billion RMB out of 948 billion RMB worth of bank loans (55 percent) issued in August were mid to long-term loans, indicating that a large amount of loans went into the property market.

Recent City-Specific Policies

The authorities’ response to these problems has been yin cheng shi ce, or “to implement policies according to specific circumstances of each city.” This means that over-demand for housing in Tier I cities must be curbed. Many Tier I city governments issued policies in early October designed to cool down the heating property market. Typically, these policies limit purchases or limit credit:

  • Nanjing banned non-resident households and single residents of the city from purchasing a second house and halted property sales to resident households with two or more homes.
  • Beijing requires a 35 percent down payment on first-time purchases and a 50 percent down payment on the second.
  • Hangzhou raised down payment requirements for second-time purchases from 30 percent to 50 percent.
  • Shenzhen will increase the housing supply by building an extra 800 hectares of housing by 2020. It also implemented one of the most restrictive policies, limiting credit flow into the property market by requiring a 70 percent down payment for second-time purchases.
  • Hefei will build an extra 5000 hectares of housing this year.
  • Shanghai will increase supervision on funds sources involved in land transactions and auctions.

The immediate impact of many of these policies encouraged frenzied buying of property by households who fear further tightening of the market in the future. There were rumors last August that the Shanghai government will increase required down payments for buying a second house from 30 percent to 50 percent. This has caused property-owning couples to divorce so that the divorced spouse with no house registered under his or her name would be able to purchase property at the original down payment rate. Panic has also spread to second tier cities such as Jinan, where more than 1300 apartment units sold out within three hours at an auction the day before the city’s purchase restriction policy was implemented.

Oversupply and Internal Political Struggles

In contrast with the first and second-tier cities, third and fourth-tier cities are still struggling to clear their real estate inventory. Housing prices in small cities are also high, but residents do not have the income to purchase property, unlike their wealthier counterparts in larger cities. High housing prices have also encouraged authorities in these small cities to build more houses, but they failed to consider how they can provide employment and social security to incoming residents. NBS reported that the nationwide real estate development investment growth rate rose from one percent in December 2015 to over seven percent in May 2016. Although the growth rate has fallen slightly, in September it remained at a dangerously high level of 5.8 percent. Due to excess development and investment into housing construction, planned residential zones can now house two to three times the size of the country’s entire population.

Unfortunately, there is conflict within the top echelon of the central government over what direction real estate policy in the country should take. Xi favors supply-side reforms such as curbing housing construction in middle and small cities; last year he called for housing oversupply to be “annihilated”. Premier Li Keqiang, on the other hand, wants to use the real estate market as a stimulus for economic growth by promoting urbanization policies. This is a reason why the State Council issued measures on October 11 to help 100 million rural migrants in cities to settle down through purchasing property.

While the State Council has always controlled economic policy, Xi has been gradually taking economic matters into his own hands since the State Council’s failures following the stock market crisis last summer. Li was noticeably absent from the Economic Situation Expert Seminar hosted by Xi in Beijing July 8, and was also sidelined at the Beidaihe Conference in August. Xi’s rejection of Li‘s stimulus approach further explains the torrent of measures issued in early October to limit housing purchases and curb overheating in the economy.

Anti-corruption authorities have also been cracking down on illegal transactions and business practices in the real estate market. On October 3, MOHURD issued a list of 45 property developers and brokerage firms from Tier I cities that have illegally spread rumors to artificially prop up housing prices. This is swiftly followed by a MOHURD policy on October 14 which listed nine types of illegal practices committed by property developers, including spreading false news about the real estate market to speculate on rising prices and selling commercial property without the proper licenses.

CCDI has also been prosecuting officials and property developers for illegal property purchases and bribery. On October 17, China Central Television (CCTV) started broadcasting Always on the Road, an eight-episode documentary produced by CCDI featuring corruption cases. It features a case concerning Vanke, one of the largest real estate developers in the country. Since August, it is increasingly common to see corruption cases featuring real estate conglomerates like Vanke and Dalian Wanda publicized. Given MOHURD’s policy, CCDI’s documentary, and state media articles on the subject it appears the anti-corruption campaign is being extended to deal with the housing bubble crisis.


About the Author

Dominic Chiu is the business advisory services intern for the US-China Business Council’s Washington, D.C. office.

Posted by Dominic Chiu