"Labouring" for a Home

Establishing A Sustainable Market To Fulfill China's Aspiration

Issue: May 2011

China gears towards a sustainable housing market
China gears towards a sustainable housing market where housing prices are maintained at an affordable rate for the majority

The relationship between house price and transaction volume is 99% correlated in China. However, there has been stronger growth in transaction volume than house price in the last decade. Price has increased more than 2.5 times from 1999 to 2010, from less than RMB 2,000 psm to RMB 5,000 psm in 2010. But, transaction volume has increased by almost seven fold from 130 million sqm in 1999 to 931 million sqm in 2010. The huge increase in transaction volume is mainly attributed to the fundamental demand driven by first-time home buyers arising from rapid urbanisation and upgraders demand of old housing stock.

Unlike the west where people would make a decision whether to rent or buy a home, in Asia including China, owning a home is everyone's aspiration. It is observed that almost 80% to 90% of the home purchases in China are for owner-occupation. This is nicely tied back to a Chinese saying ‘居者有其屋': People aspire to own a home. In Chinese tradition, people seek stability and peace at heart, which endow them with a sense of well-being. Owning a home is hence a very important element in this culture. This could be one of the reasons that drove the rapid growth in transaction volume over the years.

Transaction Volume vs. Average Sale Price in China

Transaction Volume vs. Average Sale Price in China
Source: Soufun

However, fulfilling this aspiration for the general population in China is getting tougher given the exorbitant house price in recent years. It is observed that the affordability ratio in many cities in China has risen to such a level that it is no longer affordable for an average income earner (based on PBoC 50% affordability level). This even applies to Tier 2 cities like Hangzhou, Ningbo, Dalian and the lesser known city like Nanchang. Nevertheless, the buying spree has never stopped.

If house prices in many cities have gone way beyond the PBoC 50% affordability level, how could people still afford? Interestingly in China, in addition to getting financing from banks, many buyers would seek help from family members (be it parents, grandparents and/or in-laws) in order to own a home. Hence the whole family is…"labouring" for a home. They have to work doubly hard to pay the initial downpayment and monthly instalment of the house.

Housing Affordability of Some Cities in China

Housing Affordability of Some Cities in China
Source: Soufun

Public Housing System in China

Nonetheless, with rising house price in China, there is still a lot of demand that is left unmet, especially the mid-low income earners. The government, having recognised such demand and in order to meet the common aspiration, has established the public housing system in China. This is one of the top priorities of the government in the 12th Five-Year Plan (2011 to 2015). Premier Wen Jiabao announced that China will build 36 million units of public housing during the 12th Five-Year Plan, which would mainly include public rental housing and low rental housing. He estimated that the percentage of public housing in total housing supply will reach 20% by 2015.

The public housing system (comprises the rental, economic and price-capped housing) and commodity housing system will then co-exist in the China housing market. Basically, the aspiration to own a home by mid-low income population will be fulfilled by both economic and price-capped housing, where the house price of such categories are pegged at a 30-80% discount to commodity house price.

Types of housing in China

Types of housing in China

Types of Public Housing

Types of Public Housing

Government Public Housing Targets

According to its 12th Five-Year Plan, the central government plans to build a total of 36 million units of public housing during 2011 – 2015. The target for this year is 10 million units and the central government has set 31 October 2011 as the deadline for all the local governments to start construction for their respective public housing construction targets.

Public Housing Commencement (million units)

Public Housing Commencement (million units)

To promote the development of public housing, the central government has also introduced an accountability system to the local governments – that any local government officials that fail to follow the requirements of the central government and/or any officials that could not achieve their targets on public housing development would be held accountable and subject to penalties, likely potential demotion of positions or even terminations.

A More Sustainable Housing Market

In addition to fulfilling the homeownership demand of mid-low income population, the government has also introduced measures to ensure a more sustainable housing market. Basically, the key policy directions are as follows:

(1) Tighter credit environment

In the latest round of measures, home buyers are required to pay 60% downpayment on the second home (previous: 50%) to further dampen speculation.

Tightening Measures in 2010/2011

Tightening Measures in 2010/2011
Source: CapitaLand Research

(2) Home Purchase Restrictions

As of April 2011, 36 cities have issued home purchase restriction order. In general, local residents are not allowed to purchase a third home and non-local residents with less than a year of local social security or tax payment are not allowed to buy a second home.

The only exception was seen in Beijing where eligibility for non-local residents was lifted to 5 years. On the other hand, in some provincial capital cities with smaller house price increase such as Guiyang, a third home purchase is only prohibited within the city urban areas.

The impact will be higher for tier-one cities (Shanghai, Beijing and Shenzhen) as non-local purchases account for a significant amount of total transactions. In Beijing for instance, non-local purchases account for almost half of total transaction volumes. Purchase restrictions on most of the 2nd tier and 3rd tier cities will be relatively mild as non-local purchases account for less than 10% of the total transactions in these cities.

Percentage of Non-Local Purchases

Percentage of Non-Local Purchases

(3) Price Control Target

Furthermore, as at end March 2011, the local governments of many cities have already published their home price control targets for 2011. The purpose is to control the housing price, for social harmony and for people in real need to own their homes. With the exception of Beijing, which has aimed for stable prices, the majority of the other local governments have targets for home price growth that is less than their respective GDP and/or residents' income growths. With GDP and residents' income growths for most cities expected to be positive in 2011, those home prices growth targets are essentially still allowing for mild positive property price increases in 2011. But the State Council's intention is to decrease the housing prices of these cities. So it is expected that some stricter measures may be announced by the central government in the near future.

In a nutshell

Many people in China aspire to own a home. In order to fulfill their dream, in addition to getting financing from banks, many buyers would also seek help from family members. Hence, it seems like the whole family is "labouring" for a home. They have to work doubly hard to pay the initial downpayment and monthly repayment of the house. The government, on the other hand, is also helping the people to fulfill this dream. They have established the public housing system to help the mid-low income population. Furthermore, they have also introduced measures to gear towards a more sustainable housing market so that house prices are still affordable to majority of the population in China.

Article contributed by Neo Poh Har (Research Manager) & Wang Jin (Research Intern) of CapitaLand Limited

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