Reforms Expected to End China's Property Gamble

Sun Yixiao is very busy these days as she has to find a new place to live. Her current one-bedroom apartment, which she has been renting for three years, is far more than she can afford.

When Sun graduated in 2010, the apartment located near the western Fourth Ring Road in downtown Beijing cost her 2,000 yuan (US$328) per month. Over the past three years, monthly rent rose to twice that amount, 4,000 yuan. Sun’s income, nevertheless, remained the same 4,500 yuan a month, making it impossible for her to come up with the rent every month.

Since no one-bedroom apartment rent comes lower than 3,500 yuan within the Fourth Ring Road, Sun decided to share a three-bedroom apartment with two strangers. The monthly rent of the apartment cost them 6,000 yuan in total, while Sun took up the second largest room for 2,000 yuan.

In March 2012, Zhang Zhan bought an 80-square-meter place in Tongzhou, a district at Beijing’s southeastern edge. Each month, he has to hand over 3,500 yuan to the bank in order to pay off his loans within 30 years.

With a monthly salary of 5,000 yuan, the loan accounts for 35 percent of Zhang’s yearly household income. Last month, his wife gave birth to the couple’s first child, a girl. The family has to live on a remaining 6,500 yuan a month in the expensive mega city.

Since a radical housing reform was implemented by the government in 1998, China’s property market began to take off. In the past 15 years, housing property has become an overwhelming part of a family’s household assets. With housing prices continuously on the rise in recent years, the proportion of property in household assets increased from 47 percent to 71 percent.

Is China’s economy hijacked by its real estate market?

According to the National Bureau of Statistics (NBS), China’s GDP reached some US$1 trillion in 2001, yet the real estate industry only generated 3 percent of this number. One decade onwards, the country’s GDP exceeded US$ 6 trillion in 2011, and the real estate industry covered nearly 14 percent.

From 2000 to 2008, a total of 3.29 billion square meters of commercial property was constructed. Urban per capita floor area increased from 20.3 square meters in 2000, to 28.1 square meters in 2008, with an average annual growth of 0.98 square meters.

In addition, the ratio of complete set in residential housing for urban residents went from 72.7 percent in 2000, up to 81 percent in 2008. The average annual growth rate reached 1.04 percent.

In the first three quarters of 2013, the total area of commercial housing space sold on China's property market was 840 million square meters and sales volume reached 5.4028 trillion yuan, up by 23 percent and 33 percent year-on-year, respectively.

Let’s look at an example. If a local government sells a piece of land for 1 billion yuan, the GDP figure immediately surges from 0 to 1 billion. According to the "multiplier effect," all expenses made during the real estate development process -- in design, planning and construction -- will be accumulated into the local GDP. The higher the housing price, the more the multiplier effect will come into play. For this reason precisely, real estate is the most efficient way to promote local economies.

Chinese housing prices continue to rise

The latest data published by the NBS shows that September saw housing prices in China's major cities increase for a 16th consecutive month, with the nation’s capital of Beijing leading the month's fastest growers with a 3.75 percent month-on-month rise.

According to the China Index Academy, a Beijing-based real estate research institute, the average price of new homes across 100 major Chinese cities was 10,554 yuan (US$1,734.42) per square meter in September, up 1.07 percent from the previous month. Their median price reached 7,128 yuan (US$1,171.37) per square meter, an increase of 1.19 percent.

Among the 100 major cities nationwide, a total of 79 cities witnessed an increase in monthly housing prices, eight more than in August. The growth rates of the top 10 cities are between 2.8 and 3.8 percent.

In order to tame soaring house prices, the Chinese government has already implemented a number of measures, including controlled land auction prices, higher transaction taxes, fixed prices and a tougher stance on second home purchasing.

However, housing prices in Chinese cities, especially Beijing, Shanghai, Guangzhou and other first tier cities, continue to rise.

Reforms expected to cool housing prices

The Third Plenary Session of the 18th Central Committee of the Communist Party of China (CPC) is expected to promote a range of reform measures for the current real estate system. According to some experts and industry leaders, the reforms will focus on the following three aspects.

The first aspect refers to land reform. Chinese economist Ma Guangyuan believes that the Third Plenary Session will discuss several significant issues in China’s economic reform, which will include land reform. He said, “Whether farmers will be granted the right to earn more money through trading their land is key in speeding up China’s undergoing urbanization.”

Ren Zhiqiang, CEO of Huayuan Real Estate, agreed with Ma. “The Third Plenary Session will concern land transfer reform, which is expected to promote the marketization of land in China.”

The second aspect will discuss property tax. Jia Kang, director of the Institute of Fiscal Science with the Ministry of Finance, said that although property taxes are still a topic of heated debate right now, “China is likely to expand its property tax trials amid recent hikes in home prices in many cities.”

Zou Xiaoyun, deputy chief engineer of the China Land Surveying and Planning Institute, also believes that after the meeting, property tax trials will probably be enforced and the tax scope will be expanded.

The third aspect may focus on affordable housing construction. According to Xu Shanda, former deputy director of the State Administration of Taxation, affordable housing could be a practical measure for the Chinese government to reduce housing prices.

On October 29, President Xi Jinping stated China would increase the supply of land for homes and spend more on affordable housing projects.

“The housing issue connects closely with both livelihood and development. We should make every effort to increase housing supply while attaching importance to the adjustment of the public's housing demand.” said Xi.

According to the country's 12th Five-Year Plan (2011-2015), China will increase its quantity of affordable housing so that it will cover 20 percent of all residential areas by 2015, through the construction of 36 million affordable housing units, including the renovation of run-down neighborhoods.

On November 9, the CPC’s Third Plenary Session of the 18th Central Committee opened in Beijing. Whether the above-mentioned reform will be initiated or not, China’s real estate market anxiously awaits the announcements.