Rising house prices in China

There are several factors involved in our conclusion. First of all, although the housing market has been heated up as the rapid expansion of Chinese economy, The Chinese economy expanded 9.6 percent in the third quarter of 2010.Accoording to the World Bank, from1989 until 2010, average annual GDP Growth of China was 9.30 percent reaching an historical high. Although the price of housing has almost doubled since the late 1990s; the growth of GDP still has been absolutely faster than housing price growth since the late 1980s. It is normal because a large amount of social wealth is generated by the high growth of GDP in China. Rising housing price depends on increasing social wealth. The rapid expansion of Chinese economy will cause the appreciation of real estate. As a result, the more housing prices have appreciated the more houses people want to buy. For example, Nanjing Bureau of Statistics report that Nanjing in the first half GDP increased by 13.7 percent. In the meantime, the real estate investment also has increased by 44.1percent as the high rate of GDP growth. Recent year people have witnessed the rapid economic expansion of Japan and United states. But the economic boom in these two countries ended in big crash caused by the break of bubbles in asset market and stock market. The consumption of houses contributed greatly to the growth rate of GDP. As a result, when the bubble of asset market of Japan and United States began to break, the economic boom of these two countries ended on the same time. According to the National Bureau of Statistics, 6% of China’s GDP comes from the housing market. Some people conclude that the mock boom of house market in China maintains the high rate of GDP growth, they worried about that such high percentage of asset consumption in GDP will make China repeat the tragedy of Japan and United states. But China is home to more than 1.2 billion people. With a global population of 6 billion, one out of every five people on the planet. So our housing demand definitely is much higher than any other countries. And house market also contributes more to the GDP growth. It has nothing to do with bubbles. All in all, the boom of GDP The rapid development of economy in one country does not necessary means there must have bubble exists.

What is more, special social background of China is also an important factor we should take into account. We should consider the background of housing reform of china first. Because of the highly centralized price management system; central government controls the price of all goods and distributes them by plan regardless of their real values. At that time, people even do not need buy their own house; there are no private houses all over the country. People get house according to government plan. Although they did not pay for the public houses allocated by the housing administration, the house was always not big enough to meet their needs. Several generations squeezed into one room are one of the collective memories for post70 generation. In 1979, China began the process of privation of public housing. People can buy their own house depended on their own need and fiancé. Despite the incredible rise in housing price over recent years, we consider that China’s prices have risen from a much lower base when we analyses the housing price than Japan and United states in which real estate bubbles ended in big crashes, At that time, large amount of foreign hot money flew into domestic housing market in Japan and United states that already overheated. Cities were taken over by countless Construction sites. People never concern whether or not supply of houses exceeds demand. It is obviously different from house market in China. According to the statistical bulletin issued by the Ministry of Construction, China’s per capita living area in urban areas came to 24.97 square meters in 2004, the living space averaged 26.76 square meters per person in the eastern part of China, 22.9 square meters in central China and 24.26 square meters in the western part. The housing problem has been one of most serious social problem in China. A survey in 2005 showed that nearly half of the city’s 1.8 million households face overcrowded conditions. 216,000 households had an average per capita living space less than 4 square meters; over 15,200 of those households had less than 2 square meters. So the houses in China are not oversupplied. The property boom in China isn’t a bubble because it’s supported by “solid” demand for residential housing, according to Stephen Roach, chairman of Morgan Stanley Asia Ltd. On the contrary, the supply of house is unable to meet the demand is one of the major reason why the price of houses is still such high. It is commonly accepted that bubbles will be generated when the supply excesses the real demand. The real situation of housing market in China just reflects that the shortage of supply that definitely will not generate bubbles. Sometimes similar phenomena caused by different reasons. The asset market in China does have something in common with asset markets in Japan and United States that experienced a big crash caused by the break of bubble in asset market .But it does not mean the asset market in China has bubble as well .

On the other hand, housing price in China keep on rising is not that much. Because general price of China increased by the same percentage amount. This is the normal phenomena generated by the change of price system from a government oriented society to a complete market. On the other hand, the fast pace in GDP growth generates the huge increase in household disposable income. The booming urban industry and foreign direct investment create high pay jobs for high educated people. Rural residents also have the freedom to go to coastal cities for jobs. As a result, a huge improvement of average living standard has been generated by the sustain growth of GDP. Per capita income doubled from 1991 to 2001, and then doubled again by 2008. Per capita cash income for rural residents stood at 3078 Yuan in the first half of this year, and the actual growth was 9.5 percent after deducting inflation, said the National Bureau of Statistics spokesperson Sheng laiyun. If earning 50.000 Yuan (US$6,227) per year is sufficient to be regarded as middle class, China would expect a 25% of its populace to qualify by 2010, and 33% or more by 2020. It is roughly estimated that 13.5 percent of China’s population now belongs to the middle class. A recent survey by the Hong Kong-based brokerage CLSA found that 56 percent of China’s middle-class families are considering buying a new home. In many big cities, owning two or three apartments is such common among ordinary people that people has already do not viewed it as the sample of rich . The burgeoning Chinese middle class also creates the great demand of house and other real estate that brisk housing price advancing noticeably.

On the other hand, there is no denying that the sharp price increases in housing price in China, but only several major coastal cities such as Shanghai, Beijing, Shenzhen and Guangzhou show the sharp price increases in housing price. But China has more than 92 percent of people living in small cities or rural areas the percentage of property sales in major coastal cities is only 8% of total residential property sales. China has more than 150 other cities have more than one million populations. We can see the sharp increase in housing prices in the major cities. For example, the housing price increased by 300% in Shenzhen and the increase of housing price in Shanghai also excesses 123 percent. But when we consider other medium-sized city cities such as Chengdu and Xi’an, we will find that prices in those cities have not raised much. Take Chengdu as an example, the city that has showed the fast growth of GDP and the biggest price rise of houses among the medium-sized city cities, average home prices went from about RMB 3,000 to RMB 5,800 per square meter from within one year. Xi’an is also a medium-size city as developed as Chengdu. Average prices in Xi an has increased from RMB 2,000 to RMB 4,500 per square meter. All in all, the housing price in most Chinese cities is normal and affordable. Because of the implement of ‘OPEN THE DOOR’ policy, preference is given to the great coastal cities. This policy has at the same time helps to increase the income gap between rural and urban areas. Especially for the coastal provinces of the south-east, the enthusiasm of migration is fueled by the combination of rapid economic development and the massive direct investment. The existence of many industries, factories and companies all these contribute to the massive influx of people into big cities. Particularly the highly-educated young generation studies and works in big cities has a strong desire to buy a house and raise a family in these most densely populated urban areas. The rise in immigration tends to stimulate domestic demand of house further. The bus tour of new housing sites in and around cities organized by real estate companies go everyday and always attracts dozens of people. In a word, the bubble of Chinese housing market is a totally illusion caused by the imbalance of different areas in China. People pay much attention to the housing price in high developed areas in China .like Shanghai and Beijing. But the price of assets in New York, Tokyo and Paris also reach the highest level in their own country. Some people said the housing price of Shanghai is even higher than New York, but shanghai is not as developed as New York. Therefore, they get the conclusion that the assets market of Shanghai is full of bubbles. I cannot agree with that because although Shanghai is not as developed as New York, the population of Shanghai is more than doubled compared with the population of New York. All in all, it is not objective that people evaluate the overall price level of Chinese asset market by the analysis the data of few high developed areas. If we try to make sure whether or not asset market in China has bubble, we should compare the data of different cities separately according to their different level of Development.

On the other hand, the combination of the weak supply of land, labor shortage, and the limited energy resources tend to contribute greatly to the rising housing price. The land supply is expected to continue decreasing this year, thus increasing land prices rapidly .As a result, the housing price will rise further this year . Overall land prices in China increased by 6.08 per cent to 1,198 Yuan (US$145) per square meter within 2 years, according to a report released by Ministry of Land and Resources of China on February 4, on Saturday. The increase in land price is particular evident in major coastal cities like shanghai and the port cities such as Tianjin, overall land prices increased by 5.76 per cent to 2,009 Yuan (US$243) per square meter, of which, the prices of land for commercial, housing were 3,875 Yuan (US$469), 1,746 Yuan (US$211) and 520 Yuan (US$63), per square meter, respectively. Moreover, local Governments also play an important role in the real estate market. They charge a high price for free land. Land transfer revenue in many cities has already become the main source of revenue. According to the annual report released by Ministry of Land and Resources of China on February 4, the revenues for China’s local government increased by 60 percent in 2009 because of land sales; In 2009, Local governments get more than 1.59 trillion Yuan (233 billion U.S. dollars) government revenue by selling 209,000 hectares of land . And 103,000 hectares was sold to real estate developers, up 36.7 percent year on year. As a result, the sharp rise in the price of raw materials such as land has resulted in more limited supply of house.

On the other hand, labor is not a cheap and endless resource in China we once though. Report of China Daily estimates that there are nearly a million people who involved in construction industry turned to Guangzhou and other coastal cities in China. Hu Yanping , an anxious real estate developer in Nanjing, said his construction sites are sitting idle in almost one month and more and more workers decide to resign. Although he already has promised 20 percent higher salaries and promotion to several experienced workers but still can’t attract them. Zhu Yonglei, deputy director of the shanghai Expo Coordination Bureau, said the local government had paid bonuses to construction worker who came back early from their two week New Year’s holiday or who skipped it entirely. Chinese factory bosses once though that China lacks everything but people. No matter how low salary you are willing to pay, there are still many workers available. But they have to accept that the labor market in China has already become a buyer market. The soaring costs of labor also decrease the profits that property developers can earn. All in all, shortage of labor in China is one of the most important reasons that can explain the high housing price in China. As a result, the increasing cost of Construction industry mainly caused by increasing price of labor resource. It is a normal economic phenomenon that the increase in cost definitely will lead to the increase in price of goods .It has nothing to do with bubbles.

On the other hand, prices of industrial raw materials will go up in the short term due to increasing market demand and less production. Steel is a major input in the construction. China’s major producers, led by its biggest steel maker, Bao Steel, have announced price increases on 12 products, including a 12% boost on plate steel, over the past two weeks. Steelmakers in the rest of the world-from Luxembourg-based Arcelor Mittal to India’s Tata Steel, Germany’s Thyssen Group, South Korea’s Posco and AK Steel Holding Corp. in the U.S.-have also announced or set price increases within their local markets. In the U.S., prices are slated to rise for five different types of steel. In Italy, price increases for four have been announced. Moreover, Chinese labor is cheap, but energy in China is far more expensive. As all we know, China is a country naturally with limited energy resources, so we Chinese government devote a large amount of money to energy conversion. A famous case is that China fulfilled domestic demand for crude oil by import from other countries and tax heavily on business with high energy consumption. Although a large number of human and material resources have been devoted to conserve energy, urgent signals still are sent every year from several major Chinese energy producers like electricity producers or domestic coal producers. Over the three years, China has spend more than 50 billion dollar on the imports of major energy resources and raw materials every year , 50 percent more than three years ago. Labor cost in Construction industry of China at a cost 20% below that in the US, but energy costs in China is much higher than they are in Russia, India, Ukraine, and Brazil. Energy is also the one of the most important inputs in the construction industry. Zhou Heliang, executive vice president of the China Electro technical Society, said that the construction of new residential building and public buildings must comply with energy conservation standards. The high cost of energy make such limited profits that house developers can earn that they have to increase the price of houses .It is very obvious that increasing house price will not generate bubbles.

On the other hand; Environmental protection is an increasingly pressing issue all over the country. The pollution and ecological degradation caused by businesses’ environmentally harmful activities have been brought into public attention and given rise to much debate. Especially for construction industry, it tends to do more damage to the environment than other businesses. Majority of environmental pollution in the city area caused by some construction activities such like clearing, excavating to grading. It is commonly accepted that the primary responsibility for preventing environmental damage belongs to government, but the importance of businesses and individual can never be overestimated. As a result, there are many laws and regulations have been come up with to control the pollution caused by construction industry. Bosses of companies have to change their processes and plan in response to government regulation. They must pay a large amount of money to eliminate the pollution caused by the process of construction.. Once the governments’ environmental watch dogs find the polluters, heavy fines will be imposed on companies for pollution offences. So it is no weird that the price of houses is such high, because the cost of construction makes the profits very limited.

On the other hand, the traditional Chinese value of buying property before getting married still has significant effect on modern Chinese societies and lead to post 80 generation plays an important role in house consumption. Although they are just new employee on the bottom of company, they still tend to buy their own house at all cost. Some of them even believe that marriage does not guarantee happiness but private house does. The guy needs to have a house for the young married couple to live in is one of the basic marriage tradition in China. Just a few months before, Wu jun, 25, brought his first own property, a 600000 Yuan one bedroom apartment in Nanjing. He says he decided to buy the house because his girlfriend cannot bear moving into rented apartments after getting married. Although the high housing price tends to burden him with so much trouble, his still want to express his true love by buying a new home for his girlfriend. Wu jun said, it is the guy’s responsibility to earn a house for his beloved, because “house” represents “home” or “family”. China Daily reports that more than 80 percent of mothers told a recent survey it is impossible for them to prove the marriage for their daughters if men only rent their homes. The high demand of young man for property contributes greatly to house market. On the other hand, Rent increase far exceeds the housing price According to data provided by Century 21 Real Estate shows Caoyang in Putuo, Zhabei and Hongkou liangcheng Daning cross rail along the plate. In March over the same period the previous month residential rental turnover growth of 34 percent in general, last month raised the rent level more than 10%. In the meantime, As a result, Chinese tend to buy own house rather than throwing their money away on rent. All in all, China is traditional country than having a lot of customs. Some of them are very hard to understand by foreigners. But these traditions and customs do affect every aspect of Chinese society. Economic decisions definitely are not the exception. So it is wrong that some foreign economic experts view the enthusiasm of buying house in China as a bubble in market. It is our tradition.

On the other hand, the recent surge in home prices could be explained by the high rates of inflation in China. The inflation in China continued to increase for several months to 3.60 percent in September of 2010 as rapid increase in overall price. The consumer price index also increased by 0.2 percent from 3.3 percent to 3.5percent in one year from 2008 to 2009. But the average income of people still remains the same. In order to eliminate the threat to their living standards posed by the decreasing purchase power of Yuan, people tend to find some safety ways to invest their money. But several stock market crash in china in recent year make Chinese do not want to take risk any more. But the limited financial sector offers people few investment options to resist rising inflationary pressures in China. Buying property becomes more appealing in China because decreasing purchasing power of RMB. People buy homes as a way of saving for the future. Despite the incredible rise in house prices over recent years, people still believe that investing in property is the best way to prevent their money from depreciation..

Nowadays, the new word “no lighting rate “has been brought into public attention, and many people believe that “no lighting rate “prove that asset market in China is full of bubbles. People get an interesting way to find out whether an apartment is vacantor not by counting rooms have no light on at night in residential buildings, volunteers found that 51.23 percent of the flats were empty. According to the investigation in Beijing, the housing vacancy rate is 65.6 percent. Hainan has more than 70 percent of house are identified as vacancy. Some people conclude that owners bought these properties for investment rather than their own need. They keep their properties vacant just because they expect more gains from the higher housing prices in the future so they don’t want to lease these houses out. Others argue that this conclusion is not objective enough because majority of communities has been identified as vacancy is giant villas or luxurious apartments in the distant suburbs that only a handful of rich people can afford it. They believe that the high rate of no-light only reflects the market of giant villas or luxurious apartments are becoming more and more saturated. But a large number of ordinary housing consumers are obsessed by the problem that it is hard for them to find house corresponding to their actual needs and financial situation. As a result, Small dwelling-size apartment is still very popular among buyers. So “no lighting rate “just reflects that the problem of structure rather than bubble in asset market. It warns that property developers should develop more affordable house rather than giant villas or luxurious apartments.

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Moreover, the Chinese government has an unlimited capability to stimulate the buyers. Brian Kelly said at his fund’s annual investor conference in Manhattan. As we know, the housing market in China very far away from being saturated. The government came up with a range of market cooling measures to deflate property bubble. One of them is the plan of government to introduce a property tax trial in several coastal cities of China. Shanghai, one of the richest cities in China becomes the first city to levy the 1 percent property tax on house consumers. According to the Economic Observer reported, prices for new houses in Shanghai decreased by16 percent in a week to19024 Yuan per square meter. And transactions for residential houses reduced by 27 percent from the previous week’ low. With the rapid one of the other tightening measures is to restrict foreign hot money flowing into domestic house market. Government officers come to realize that the support from foreign buyers is an important reason why housing price is so high. Although the price of house is only affordable by middle or upper class in China, Chinese real estate is seen as good value in some developed country. Some overseas investors fear that investing in local real estate will make them on the risk of loss as the slow speed of economy development. They tend to consider China as safe havens to invest their capital. As a result, a large amount of foreign capital pours into the real estate’s market and the large overseas consumption foe houses also plays a very important role in driving the price of house up. Now Government implements tight policy to foreign investments in China. Foreigners must provide the certificate to prove the houses they buy are only used for their own needs rather than for renting and any other commercial use. This policy is effective to limit the direct investment in domestic housing market by foreign capitals. On the other hand, providing more affordable house is also an effective way to cool down housing market in China. According to the report from China Daily, the Beijing government vowed to offer 134000 units of welfare housing in 2010, and the Shanghai government also vowed to provide 700000 welfare apartments for new immigrants in 2010. And the central government also set a target of building 5.8 million units of affordable housing in 2010. This program will cool rising housing price further. New loans for property have increased by 327 percent from 480 billion Yuan to 2 trillion Yuan within one year. The growth rate in the first half of 2010 also has increased by 47 percent compared with the same period of 2009. Some economists warn that it is a very dangerous signal because Japan and United States also showed the high rate of household debt before the crash of their property market. The personal savings rate in China is much higher than any other countries. More than 50 percent Chinese regularly save 50 to 60% of their income and it feels normal to Chinese to save as much as possible. Credit cards are still fairly rare in China and most people pay for everything in cash. PBOC vice governor Yi Gang said on Dec 26 Chinese individual bank savings had exceeded 20 trillion Yuan ($2.92 trillion) while loans, including those for cars and housing, added up to just 3.7 trillion Yuan by the end of September 2008.So we do not need to worry about household debt will put more pressure on Chinese economy. On the other hand, Loans for third home purchases will be completely suspended at the end of this year in order to curb the rising housing price. This new rule also indicates that all first home buyers will have to pay a down payment of at least 30 percent of the purchase price. This rule is much different from the previous one issued on April 17. According to the previous rule, only first time buyers purchasing an apartment above 90 square meter in area need to pay a 30 percent down payment. So under the pressure of government policy for asset market in China, the level of increase is very limited. And bubbles that many people worried will break before their form

All in all, the asset market in China works healthy and normally, there is no such problem like bubble exists. Above reasons of increase in housing price will occur in any economic entities and not generate bubbles. We are confident enough to expect the better future of China.