China’s Housing Development Strategy in NEW NORMAL
Ting SHAO Development Research Center of the State of Council, China (DRC) 2016-1-13
Main content Evolution path Challenges Policy evaluation and reform
Part 1: Evolution path
Database: Wenjing Deng et al, Urban Housing Policy Review of China, OTB working paper,2015-01
Housing tenure distribution
Database: Wenjing Deng etal, Urban Housing Policy Review of China, OTB working paper,2015-01
Housing condition improves quickly 40
Average Housing Area per Capita, in square meters
37.09
35 32.91
30
25
20
15
10
5
0 1978
1980
1982
1984
1986
1988
1990
1992
Urban(square meters per person)
Database: National Bureau of Statistics of China
1994
1996
1998
2000
2002
2004
2006
Rural(square meters per person)
2008
2010
2012
0%
Database: National Bureau of Statistics of China ratio of real estate value added to GDP ratio of real estate investment to gross fixed investment 2015-07
15%
2015-03
2014-11
2014-07
2014-03
2013-11
2013-07
2013-03
2012-11
2012-07
2012-03
2011-11
2011-07
2011-03
2010-11
2010-07
2010-03
2009-11
2009-07
2009-03
2008-11
25%
2008-07
2008-03
2007-11
2007-07
2007-03
2006-11
2006-07
2006-03
2005-11
2005-07
2005-03
Housing sector is crucial to China 30%
25.60%
20%
17.90%
10% 6.00%
5%
If we consider linkage with upstream and downstream industries, real estate is even more important If real estate(include construction) sector declines by 10%, then‌
DatabaseďźšWorking paper of PBOC, 2015
But housing sector is slowing down in recent years 50%
In percent, Quarter-on- Quarter
40% 30% 20% 10% 0% -10% -20% floor space under construction
floor space started
Database: National Bureau of Statistics of China
floor space completed
Real estate investment growth is dragging down GDP growth rate 16%
35%
33.16%
14.2%
14%
30%
12%
25%
10%
20%
8% 6%
6.9%
15%
16.15% 13.71%
10%
4% 10.49%
5%
2% 2.6%
0%
0%
GDP growth rate
Real estate investment growth rate(right)
Database: National Bureau of Statistics of China
Part 2: Challenge On the surface: Overcapacity and Overprice
Underlying challenge: Local governments over-reliance on housing sector Demographic change Decelerating urbanization rate
The no. of months it takes to sell all inventory housing is steadily increasing 9
800 8.08
8
696.37
621.69
7
600
6
500
5
4.9
4
400 300
3
200
2 1
700
1.38
100
0
0
floor space unsold(million square meters,right) Linear (Real estate Inventory ratioďźˆmonth,left))
Database: National Bureau of Statistics of China Note: Inventory ratio=floor space unsold/floor space sold (month)
Real estate Inventory ratioďźˆmonth,left)
Potential housing supplies will worsen the problem even further… Floor space under construction still large By November 2015, floor space under construction reached 7.2
billion sq. m. In contrast, the total floor space sold from January to November 2015 was 1.1 billion sq. m. At this speed, it will take around 6 years to fully absorb this amount Significant amount of undeveloped land area By November 2015, land area purchased by developers but not yet
developed reached about 0.2 billion sq. m. …which will translate to 0.6 billion sq. m. in housing supply, assuming 1:3 floor area ratio
Year
The no. of years it takes to sell all existing AND future inventory housing is rapidly increasing 7
6.5
6
5
4
3.6
3
2
1
0 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2011
2012
Database: National Bureau of Statistics of China Note: Inventory ratio=ďźˆfloor space unsold+floor space under construction/floor space sold (year)
2013
2014
Price divergence among cities: prices in Tier 1 cities more resilient 25%
In percent, Month-on-Month 20%
15%
10%
5%
0%
-5%
-10%
Tier I
Tier II
Database: National Bureau of Statistics of China Note: only includes newly developed houses Tier 1 cities: Beijing, Shanghai, Guangzhou, Shenzhen
Tier III/IV
70 large and medium cites
180
160
40 1970.Q1 1971.Q1 1972.Q1 1973.Q1 1974.Q1 1975.Q1 1976.Q1 1977.Q1 1978.Q1 1979.Q1 1980.Q1 1981.Q1 1982.Q1 1983.Q1 1984.Q1 1985.Q1 1986.Q1 1987.Q1 1988.Q1 1989.Q1 1990.Q1 1991.Q1 1992.Q1 1993.Q1 1994.Q1 1995.Q1 1996.Q1 1997.Q1 1998.Q1 1999.Q1 2000.Q1 2001.Q1 2002.Q1 2003.Q1 2004.Q1 2005.Q1 2006.Q1 2007.Q1 2008.Q1 2009.Q1 2010.Q1 2011.Q1 2012.Q1 2013.Q1 2014.Q1 2015.Q1
Yardstick #1: Ratio of house price to income To make data comparable across countries, we index long-term average of house price/income ratio=100
China
Database: The Economist; OECD Note: income per person after tax USA
165.4
140
120
100 94
80 68.6
60 51.3
Japan
Why is China’s house price/income ratio dropping? Because Tier I cities are actually outliers – house prices in most cities are affordable 30,000
New Housing Unit Price (RMB/sq m)
Bei Jing
25,000
Shang hai
Shen zhen
20,000 y = 0.5386x - 4622.3 R² = 0.46472
15,000
10,000
5,000
-
10,000
15,000
20,000
25,000
30,000
35,000
Per Capita Disposable Income (RMB)
Database: National Bureau of Statistics of China
40,000
45,000
Yardstick #2: Ratio of house price to rent 170
150
To make data comparable across countries, we index long-term average of house price/rent ratio=100 144.8
141.5 132.2
130
110
90
70
50 1970.Q1
1980.Q1
1990.Q1
China
2000.Q1
USA
Japan
Database: The Economist; OECD; ONS; Standard &Poor; Thomson Reuters
2010.Q1
Gross Rental yields in china is much lower
Database: Global property Guide, www.globalpropertyguide.com/Asia/rent-yields.
Underlying Challenges: Strong incentive for local governments to boost housing sector too
much Demographic change Decelerating urbanization
Fiscal arrangement: Imbalance between revenue and spending responsibility in local governments 90
85.13 77.98
80
71.74 70 60
54.05
50
45.95
40 28.27
30 22.02 20
14.87
10 0 Ratio of Central gov's revenue
Ratio of Local govs' revenue
Ratio of central gov's spending 1993
Database: National Bureau of Statistics of China
2014
Ratio of Local govs' spending
Local government relies on real estate too much 80%
75.9%
In percent, Ratio of local government’s revenue
70% 64.32%
60% 50% 40% 30% 20% 9.19%
10% 0%
2.44% 1999
2000
2001
2002
2003
2004
real estate tax
2005
2006
deed tax
Database: National Bureau of Statistics of China
2007
2008
2009
2010
land leasing revenue
2011
2012
2013
2014
Local governments restrict residential land supply 100% 90%
0.18
80% 0.51
70% 60%
0.41
50% 40%
0.25
30% 20%
0.41 0.24
10% 0%
2003
2004
2005
2006
Industry
2007
2008
real estate
Database: National Bureau of Statistics of China
2009
2010
2011
Infrastructure and others
2012
2013
2014
Cheap industrialization, expensive urbanization 30,000
Residential Land Price
Industrial Land Price
25,000
Land Pirce (RMB/sq m)
100 cities, 2013 20,000 y = 0.5856x - 9587 R² = 0.39077
15,000
10,000
5,000 y = 0.0351x - 234.33 R² = 0.30257
-
10,000
-5,000
15,000
20,000
25,000
30,000
Per Capita Disposible Income (RMB)
Database: National Bureau of Statistics of China
35,000
40,000
45,000
Demographic change 2010 housing census showed 25-39 age group mostly likely to buy a house In percent, ratio of urban population
28 27
75
26.92
74
74.4
26
73.41
73
25 72 24 71 23 22
23.4
70
70.4
22.34
69
21 20
2003
2004
2005
2006
2007
2008
Age:25-39(left)
Database: National Bureau of Statistics of China
2009
2010
Age:15-64
2011
2012
2013
2014
68
Boosting urbanization rate will not offset aging population, although the effect of new “two-child� policy remains to be seen 1.8
30 1.61
1.6 25 1.4 1.2
20 1.04
1
15 0.8 0.6
10
0.4 5
Increase of urban residents(million,right)
Database: National Bureau of Statistics of China
Increase of urbanization rate(%)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
0
1978
0.2 0
Migrant workers move to cities at decreasing rate 180
4
3.40
3 175
2 1
170 0.00
165
0 -1 -2
160
-3 155
-4
Peasant workers(million,left)
Database: National Bureau of Statistics of China
growth rate(%,quarter-to-quarter)
Part 3: Policy evaluation and reform Sensitive to financial conditions Land supply matters Property tax pilot: no effect on housing market Affordable housing have goods and concerns
Sensitive to financial condition Jan, down payment over 40%
30%
25%
oct.2004,27 bp increase of interest rate
april, increase loan rate for two houses
sep,2005,(ghten Housing trust 108 bp increase
20%
down payment 50%
Jan,increase the loan rate and down payment
15%
sep,oct, reduce 81 BP, downpayment is 20%
10%
march,2005,down payment ratio from 20% to 30% 5%
April and August, 2006,54 bp increase
Nov, reduce 40 bp loan rate
march to may ,increase requirement rate 150 BP
0% 1998
1999
2000
2001
2002
2003
2004
-5%
Database: National Bureau of Statistics of China
2005
2006
2007
2008
2009
growth rate of residential housing price
2010
2011
2012
2013
2014
E.g. Accumulation effect of interest rate change
2014
2015
300,000
341,785
5.00%
3.60%
Total interest payment(30 years)
232,500
190,716
Yearly principal repayment
10,000
11,393
Total house price(principal repayment+interest costs)
532,500
532,500
　 House Price 30 year fixed mortgage rate
Land supply matters 80% growth rate of housing land supply 60%
growth rate of housing price（one year lagged，right）
40% 20% 0% 2004
2005
2006
2007
-20% -40% -60%
Database: National Bureau of Statistics of China
2008
2009
2010
2011
2012
2013
2014
Initial result of property tax pilot reform Local experiments in Shanghai and Chongqing since Jan. 2011:
little progress In 2014, Chongqing raised the threshold of luxury housing tax
for the third time to 13192 RMB/square Share of real estate tax in Chongqing’s revenue is less than 2%. In 2014, shanghai collected real estate tax 10 billion RMB. If
exclude commercial，business housing, residential housing tax is less than 1 billion RMB.
Affordable houses developed quickly 16
80
71.8
14
70
12
60
55.8 51.8
10
47.5
53.8 50
45.3
8
40
34.5
6
30
4
20
2
10
0
0
2009
2010
2011
new construction of affordable house(million units)
Database: National Bureau of Statistics of China
2012
2013
2014
new construction of house(million units)
2015* ratio(%,right)
In 2010, 9% of urban households whose floor space per capita is less
than 8 squares, while in average is 29 squares per capita.
In 2010, China initiative a massive package of affordable housing
construction.
2011-2015,plan to construct 36 million affordable house units. Until
2015.Q3, have constructed 39.15 million unites.
2015-2018, plan to renovation 18 million units of dilapidated buildings
of various types, including urban shanty towns, villages and 10.6 million dilapidated rural houses
Affordable housing enjoys special treatment Land are free or low-price and have a priority in allocation Cheap and easy money: China Development Bank gives the lowest
lending interest rate Huge subsidies from central and local government
Concerns How to give a reliable source of revenue to local governments?
For cities that are facing overcapacity problem, building more
affordable housing will further worsen the situation.
Reform Strategy Stabilize housing financial condition Increase down payment rate when interest rate decreases and vice versa
Promote real estate securitization: mortgage-backed securities and Real
Estate Investment Trust (REITs) Grant migrant workers full disposable right to rural land and homestead more asset-based income to buy house in cities
Promote property tax to become main revenue source of local
government Local governments transfer ownership of affordable houses to residents Provide revenue and relieve fiscal pressure on local governments
Local governments buy unsold commercial housing and sell to medium-
and low-income families at discounted price
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