In becoming the superpower it is today, China has had to face numerous critical junctures. Since the late 1970s, the nation’s leadership has worked to marry a hybridized form of capitalism with China’s communist legacy, resulting in a mosaic identity full of interesting contradictions. The nation’s real estate market highlights how the mélange of capitalist and communist ideals inherent to modern-day China has given rise to one of the most markedly unique economies in the world.
Rise of a Giant
Before 1998, citizens of mainland China were not free to buy and sell real estate at will. Property allocation was handled primarily by the communist government, so real estate investment was not a desirable nor easy activity. This all changed in 1998, when waves of privatization in China led to real estate becoming commercialized.
Developers eagerly jumped on the new opportunities afforded to them by the privatization of the real estate market, and the rapidly growing wealthy and middle classes were equally as eager to invest in properties.
Citizens of mainland China could now get mortgages, rent and sell properties, and move around in a more diversified job market. The central People’s Bank of China kept interest rates low, so credit was cheaply available for home purchases. Property values skyrocketed, and real estate investment became a cornerstone of the Chinese economy.
Indeed, China’s command economy helped in the rapid escalation of the country’s property market through the late 1990s and 2000s. During this time, the Chinese government was heavily pushing for urbanization, investing in city-based industries and divesting from rural programs. The result was one the largest mass migrations in recent history. Over three decades of economic liberalization, more than 500 million Chinese people have moved from the country to cities, a staggering amount of people, which The Economist points out is the equivalent of the United States plus three Britains.
The construction boom that came with China’s massive urban migration, coupled with the increasing real estate demand from the wealthy, helped keep the Chinese property market red hot for nearly a decade. In 2008, though, the worldwide economic downturn began to cause the first real signs of a slowdown in the Chinese real estate market.
In order to help keep the property market strong, the Chinese government injected CNY ¥400b (USD $58b) into the real estate market, and introduced many new regulations that kept property values more or less stable until 2014.
Despite having the second largest economy in the world, the income disparity between China’s richest and poorest citizens is far greater than in many western nations. As detailed by the China Spectator, the richest 1% of urban households in China own an estimated 30% of the country’s real estate assets.
Tight restrictions placed on the Chinese housing market by the central government in 2011 aimed to keep housing affordable for people outside of China’s wealthy class. They were much needed, as “property price to income” ratios had reached staggering levels in China’s largest cities. In Beijing, for example, the price-income ratio for properties was hovering around 27:1, five times above the global average.
Government efforts such as restrictions on foreign investment, reigning in on the formerly cheap credit-lending market, and demanding higher down payments for second and third homes helped cool the real estate market between 2011-2014.
Still, demand for real estate investment remained high through the ups and downs of China’s real estate market from 2008-2014. This demand, along with the need for jobs, meant that luxury properties continued to be built and invested in. By 2014 though, many new luxury properties began to lose value as no investors actually went to live in their properties. Now, many “ghost towers” and “ghost cities” exist in China because of this phenomenon.
Nevertheless, the central government has continued to increase the supply of affordable housing for the still rapidly urbanizing Chinese populace, while demand for high value properties in Chinese cities has continued to shrink.
As demand for luxury properties fell and mega-wealthy Chinese investors turned their attention elsewhere in the world, the cooling property market finally began to shrink in May 2014. The average property in China has continued to lose value on a year-over-year basis since then.
Some experts have taken this downturn as a sign that government policies and market forces have caused the formerly hyper-inflated real estate market to correct itself. To them, the Chinese economy can absorb this blow, and fair better in the future because of it.
Others have speculated that the shrinking real estate market in China could signal worse things to come. They say that “the bubble” could burst for the entire Chinese economy, sending millions back to poverty and impacting global markets.
Only time will tell whether or not China’s hybrid of communist policies with a privatized housing market will remain sustainable. What do you think?
Carson Pfahl, a graduate of political science from UBC, is a Vancouver-based curator and freelance writer who contributes frequently to RESAAS Blog.
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