Housing Market Bubble: Overview and Latest Development

In this article, we would like to discuss about a hot topic today in China - the housing market and its latest development. To go deep into the China real estate market development, we must start with the China State Council Document #18, titled "Promote the Continuous and Healthy Development of China Real Estate Market", issued in 2003. This was the first time the Chinese authorities included the real estate market as one of its pillar sectors for national economic growth. After that, the China property market has started to boom. The below overview shall summarize the major events for the latest China real estate market development:

(1) As the Document #18 was then widely criticized and claimed responsibility for the latest housing market bubble, China State Council had then removed the real estate market industry from a list of sectors that the Chinese central government wanted to support as pillars of national economic development on 22 October 2010.

(2) On 26 January 2011, Chinese authorities introduced eight new key measures to cool the over-heated real estate market. Read details at: New National Eight to Cool China Property Market.

(3) From 28 January 2011, Chongqing and Shanghai became the first two cities in China to introduce residential property taxes. Read details at: Shanghai Residential Property Tax Just Freezes Purchases and Boosts Rents.

(4) On 15 February 2011, Beijing municipal government introduced the well-known "New Beijing 15 Articles" to cool down the real estate market of the city. Local government housing department officers said that the "New Beijing 15 Articles" can help narrow the wealth gap in the city, help bring the local property market under better control by reducing speculation, guide home purchases to the right direction and also better distribute housing land resources. You may read more details at: Beijing Implements Restriction on Foreign Property Purchases.

(5) On 26 April 2011, Beijing municipal government unveiled the details of its "One-Flat, One-Price" Policy that property developers or agents should disclose clearly each flat's price with floor area as well as any other related property charges. This policy can improve the overall price transparency level of the Chinese property developers or agents.

(6) On 28 April 2011, Chinese authorities considered to put the property sector into the list that companies in this sector are not permitted to earn windfall profits. The anti-windfall measures would include imposing windfall profits tax over property developers. However, we wonder if the future supply of residential housing market may then be negatively affected, since the property developers may have to change their focus from residential housing market to commercial building market for better valuation. In fact, windfall profits tax is not something new in China and has been used to control the profit margins of services or products which Chinese authorities believe that they are important for social development or people livelihoods. For instance, similar windfall profits tax has already been imposed on the domestic oil industry since 2006.

(7) On 12 July 2011, China State Council introduced "New 5 Articles" to extend the implementation of property purchasing restriction policy from the top-tier to some over-heated tier-2 and tier-3 cities. Again, the effectiveness of the new policy should depend on the degree of support from the local government cross-departmental officers. Since the restriction policy focuses only on preventing entry of new investors, it still cannot change the fundamental "price-rising expectation" in the China real estate market and may even trigger irrational home purchases with the concept of "Buy earlier, Earn more" that can result in a even bigger housing bubble.

In addition, the proportion of foreign property purchasers in 2nd or 3rd tier cities is not as high as that in the top-tier cities, and may just defuse the overall efficiency of the property purchasing restriction policy there. According to property agents, it is also not too difficult for non-local residents to escape from the policy that restricts their home purchases by just getting around the documentation proofs. Historical social insurance department data showed that the number of accounts contributing to social insurance in Beijing increased rapidly by more than 33% after the introduction the previous "Beijing 12 Articles" that restricted home purchases of non-local residents in 2010.

What's next? It is now well-known that the unaffordable real-estate is one of the most crucial factors illustrating the gap between China's growing middle class and its poor massive population. The above policies imposed by government authorities unavoidably pent up demand of home purchases from young middle class couples, especially for non-permanent residents, that continue to boom. In fact, Chinese economy still dangerously depends on investment in real estate development and construction sector. Such spending actually shot up by +24% YoY in 2010. The sales of land-use rights contribute a huge share of the revenues for most local governments including Beijing, Shanghai, Chongqing, Guangzhou and Shenzhen etc. Many local governments are still getting over 40% of their revenues from the property markets. No local government officers would therefore like to see a collapse in its own real estate market.

We believe either property tax or the latest "New Beijing 15 Articles", after going nationwide to other over-heated tier-2 and tier-3 Chinese cities, can reduce the danger of this dependence and may also avoid a housing market bubble that will hurt the national economy if it bursts. This should be considered as a healthy move and will also help to prevent a possible hard landing of the China property market.