The Impact of Chinese Restriction Strategy on Real Estate Market

Background

 Land market has a crucial position in urban management since the availability of land development is a restraint on the city expansion, or, a driver of urban economic growth. In a modern economy society in China, real estate embraces three realms, production, circulation, and consumption respectively, which plays an essential role on increasing fiscal revenue, creating career opportunities, improving citizen’s living standard and leading relevant industries to develop. Real estate is regarded as a “barometer of Chinese economic development” (Hualongtai Group, 2017). In the 90s, the real estate market has expanded and promoted the residential housing to divided into welfare housing and commodity housing. However, since the reform and open-up strategy in the 70s, the welfare housing support plan has started to be terminated, and in 1998, government explicitly stated in an official initiative of housing system reform, to stop housing distribution and carried out housing commercialization (Chinese Real Estate Newspaper, 2013), which gave a great support to the development of commodity housing market. In the recent two decades, the development of real estate indeed has a positive contribution to improving the living condition of urban citizens and promote the development of domestic economy. According National Bureau of Statistic of China (2017), the total floor space of commercial housing reached 1.3 billion square meters, which is 12.7 times more than the floor space in 1998; and from 2005 to 2015, there are 77.23 million residential packages had been built.

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Furthermore, comparing with the statistics counted in 1998, real estate occupied 6% contribution to Chinese GDP in 2015, increasing in nearly 2% point. If considering the positive connection to the architecture industry, building material industry, contribution to job opportunities and tax revenue, there is a broader influence on the state. Therefore, keeping housing prices increases gradually and developing robustly was an essential direction for China and that time.

 Notwithstanding the reform these days, it is no doubt that the real estate in China entered bubble period as an extremely fast growing. The expansion of the Chinese real estate market has a connection to an increasing housing price as well as the decline of house affordability. Chinese Housing Price Index indicated 78% increase on housing prices from 1998 to 2010 (see Figure 1). In 2012, China was in the period of fevered speculation of house buying and experienced rapid growth in the real estate market. During 2012, there is a slowdown in the housing market because of the implementation of the Chinese government to limit the speculation activity in the real estate market (Gaulard, 2014). At the end of 2015, the real estate market in China began to be stable, but that situation does not last for a long time. In the fourth quarter of 2016, the real estate market in first-tier cities continued to soar and hotter than before. The 100 City Price Index has risen to nearly 12120 RMB per square meter (Balding, 2018) It was evident that the massive sales number indicated speculative bubbles in major cities in China due to the rising middle-class income, urbanization demand, new families and housing investment trend. With worry about housing prices in major cities, the Chinese government has launched a series of policies to curb the high and growing housing price.

Figure 1: The diagram of the trend of Chinese housing price. Gang, 2018.

State Policies to Control Real Estate Market and Outcomes since 2003

 State policy to intervene land market is applied to countries around the world and various land use systems, which will be mainly categorized into two types (Evans, 1999). The first form embraces a serious of land use regulation, including development boundary, conservation area, and other growth control policies. The other way involves the control of the supply of land source since the Chinese government still hold the ownership of the lands. The intervention to land market supply will significantly influence on the outcome of real estate market because those regulations will lead to a fall in numbers of the availability of land supply for real estate development (Kim & Cho, 2010). Even in different kinds of markets, the ideal circumstance is to reach the equilibrium point. Thus, the government might have a task to ensure the housing supply to satisfy the market demand and maintain a stable status in the real estate market (Rosen & Ross, 2000).

 Chinese real estate industry has been influencing by state policy with a bumpy development. Since August 2003, real estate industry explicitly positioned as one of the pillar industries to promote domestic economy and develop sustainably in Circular of the State Council on Promoting the Continuous and Healthy Development of the Real Estate Markets, published in 2003 (State Council of China, 2003). But this documents also pointed out a series of problems in real estate market, involving the uneven development, prominent conflicts between demand and supply, overgrowth of the housing price and inadequate supervision for the housing market. The uneven development reflected in the coastal cities and inland cities, urban and rural land development and housing quality inequality. After this circular had been published, housing price continued to increase since government positioned commercial housing as a dominated part in the market, encouraging a full competition of real estate market. Thus, in 2004, the Chinese government declared through People’s Bank of China that the increase of reserve requirement ratio was 0.5% and 110 billion yuan of available loans was frozen, aiming at reducing the haphazard investment in real estate development (Xu, 2012). But this policy made no effort on the housing price restriction. In the following period, the Chinese government kept on proposing the regulation to stabilize housing price by enhancing the macro-adjustment to bidirectional control to supply and demand until 2008, year of global financial crisis. The global financial crisis caused the fall of Chinese export volume, transaction volume of the housing and bankrupt of many enterprises. There was 50% decline of housing price in some cities and lowest transaction volume in a decade, which forced the government to rescue the market and push 4000 billion yuan to stimulate the recovery of ten significant industries (Gang, 2018).

Nevertheless, a large portion of this 4000 billion flowed to the real estate market. In the first two quarters in 2009, the residual impact of the financial crisis remained, and the published policies motivated for the development of real estate market, especially for the local governments were able to introduce rescue-market policies to push housing market of cities alongside the coast. As a result of the continuous growth of housing price and speculation, the Chinese government decided to control the housing market again, but the irrepressible rising trend of housing price seemed to out of control. As for 2012, the housing price-to-income ratio reached 25, which is much higher than New York and Tokyo, but a large number of houses are vacant (Li, 2013). The government started to push forward policies of purchase, loan and price limitation, leading to a 20%-40% decline in housing price (Xu, 2018).

 Despite the fall of housing sales transaction and price, the purchase restriction strategies caused an enormous housing inventory. In 2014, the Ministry of Housing and Urban-Rural Development had stated that the commercial housing for sales should be fixed in those over-inventory places. Except for the first-tier cities, 42 cities which had been imposed purchase limitation strategy, loosed the restriction of housing purchase in the adjustment of benchmark lending rate, the proportion of down payment (Global Times, 2015). But there was not considered to achieve the expected effect, while the growth of the real estate market was still at low speed and cool down comparatively.

 As government eased housing loan in 2015, more than 150 cities in China proposed policies to destock inventory, leading to a sharp rise of housing price. Comparing with the growth in 2009 (heated tide spread around the nation), the protagonists in this growth event are the hot cities (first-tier and second-tier towns), with a 30%~40% increase rate, equivalent to the sum of the first three years. The government had to terminate the loose policies to the housing market, and many cities carried out the purchase and loan restriction regulation. In terms of the statistics from Xinhua Net (2018), from January to June in 2018, the real estate restriction policies had been published for more than 180 times, and 73 cities followed the procedures to push forward more than 135 purchase limitation policies, 176 loan restriction regulations, land auction limitation, and 51 towns implement sale restriction policy. As a result, Hou (2018) has shown that the fluctuation of housing price started to be stable, especially for those heated cities (such as Beijing, Shanghai, Guangzhou, Shenzhen, etc.). But on the other side, in those who are not the regulation-focus cities, the housing price has an increasing trend and might become the next heated tide for housing purchase, so that government also restrained the buying in the third-tier cities (Beijing Business News, 2018).

Evaluation and Implication

 The real estate market has experienced many ups and downs in these years with the macro-administrative intervention. According to the state policy toward real estate market during 2003 to 2018, it is evident that the purchase and loan limitation, housing price and land auction restriction have become a major mean to control the housing market demand. From the perspective of the short-term effect, administrative means indeed have a significant impact on housing transaction volume and prices (e.g., the price decline in 2013). However, the result of suppressing demand is temporary with limited effectiveness, because rigid and speculative demand will be aroused when restriction policies loosed again (e.g., the destocking policy motivated the housing market in 2015). The Chinese government may overlook to balance supply and demand, the foundation of market principle, just adjusting the demand side by promoting restriction policies.

On the other hand, there might be some interest conflict between central government and local authorities, because the main assessment indicators for member of local authorities is GDP (Cao & Zhang 2014), while the real estate industry occupied a significant part in region al GDP and fiscal revenue, having positive contribution to achievement accumulation of local authorities. That might be one of the barrier factors to implement policies fully. Additionally, the purchase e limitation policies act on a wide range other f cities without taking consideration of those whose lands or real estate market should be encouraged to develop. That might lead to a development inequity and enlarge the gap between rich and poor in the state.

There still other reasons for failure to fix the housing price increase. The source of rigid demand of the Chinese real estate market is due to the dynamic population structure and urbanization. During the period from 2001 to 2016, Chinese urban population grew about 20 million per year with an annual urbanization growth rate at 1.23% (see figure 2) in average (China News, 2018), and the urbanization process is still promoting.

Figure 2: The urbanization rate of China 2011-2016, Chinese Economy Net, 2016; Chinese Statistics Bureau, 2017

The housing demand of those who move from rural area to urban, leading the demand excessed supply, that is, the increase of housing price, but they may not be able to afford such high cost. While solving this dilemma, the implemented policies might not completely match the reality situation. The unsound affordable housing system could not provide strong support to the citizens in need. Moreover, in the control strategies, the administrative policies – purchase restriction policy, occupied a dominated position, and other policies like currency policy, fiscal policy (e.g., taxes) occupied a smaller proportion with a weak enforcement power, which is just to clamp down the housing demand and lack understanding of root cause. There are many factors that affect the housing price. For the supply side, in 2015, the land supply reduced 33% and many cities have land shortage problem, including Shanghai and Beijing (Xie, 2017). Some first-tier cities in China also existed a shortage of housing supply but third and fourth-tier city even excessed land supply. Besides, the ratio of housing for sales and completely constructed housing was 2.12:1, that is, when one housing complete its construction, there were 2.12 housing has been sales (Ren, 2017). Thus, if developer no long build a new house in first-tier cities, the new housing inventory will become zero (supply shortage). For the demand side, the population has a trend to concentrate into large cities which can provide better education, medical and job opportunities resource. Additionally, as a result from the second-child policy and reform of the household registration system implemented, the total urban population must be continuing to grow in these years. The increase in population, middle-class population, average income level and employment create massive demand that empowered housing price to rise much more than 600 percent in first-tier cities. Government can slow down the housing price substantially unless they handle the source of the problem. The objectives of macro-control should be to stabilize the growth rate of housing price, restrain speculative investment in real estate market and fix the “bubble” in real estate market. The means should be sustainable and available for long-term effect. In addition, both demand side and supply side should be considered and concern more about the essential cause into the policy-making process.

Nonetheless, the Chinese government seems to review the experience in controlling the real estate market during these two decades. It is expected that the Chinese government may reform the existed control system to boost the housing market to develop soundly rather than control its development. The real estate market still a potential development space in China because the urbanization ratio is far from the developed countries. Real estate industry could remain its significant position in the domestic economy. Meanwhile, the real estate market has formed a serious of industrial chain, including land, architecture, trade and another kind of services with multi-departments, connecting tightly with other essential industries. The methods applied in the housing market can be considered as an experiment, a new circumstance without case in point as a guide (Shepard 2017). In the future, the Chinese government might be able to find a unique and suitable way to maintain equilibrium between demand and supply, protecting the real estate market to develop robustly and sustainably.

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