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The State of Housing markets in China: Trends, Patterns and Affordability

Siqi Zheng

Institute of Real Estate Studies, Tsinghua University

Peking University – Lincoln Center

Joyce Yanyun Man

Peking University – Lincoln Center

College of Urban and Environmental Sciences, Peking University

Rongrong Ren

Research Institute of Investment National Development and Reform Commission

Peking University – Lincoln Center

Since housing reform in 1998, the housing market in China has experienced a rapid development. It has dramatically improved the housing conditions of urban residents, whose floor area per capita increases from 19.4 m2in 1999 to 31.6 m2in 2007. However, the considerable increase in housing price and consequently housing affordability problem in a large number of cities have posed enormous challenges for Chinese governments, at both the central and local levels. In order to address policy issues related to housing markets and housing policies in China, this study attempts to  analyze the trends, patterns and affordability of housing markets in China since the housing reform.

I. The Trends of China’s housing market Development

The development of Chinese housing markets is accompanied by rapid economic growth in China during the period of 1999 and 2007 when the GDP and urban household disposable income both experienced an annual  growth rate of about 10 percent on average. The rapid urbanization from about 20 percent in early 1980s to  nearly 45% in 2007 is also a driving force of the dramatic growth of housing markets in China’s urban areas. In this section, the trends of housing market development with respect to housing supply, housing transaction and housing price are discussed. Due to the data limitation, all our discussions in this  section focus upon new  residential housing markets instead of housing stock.

Land Markets and Land Supply

The housing market development in China in the past decade is fueled by the drastic increase in land supply  by central  and subnational governments. The central government  is determined to stimulate economic growth by developing real estate market and construction sectors.   The Chinese  local  governments faced a big  gap between its expenditure assignment and revenue assignment after 1994 tax reform and turn to collecting land transfer fees for revenue sources to finance public goods and services as mandated by the central government. In anticipation of great profits in the housing sectors, there is a rapidly  growing number of companies, both state and  privately owned companies, that enter into the real estate markets. In 1999, only about 120 million square meter of land was purchased by Chinese developers, but by 2007 this figure reaches 402 million square meters, a nearly 235 percent increase during this period. As Graph 1 shows, the investment on land development experienced a double digit growth every year except for 2004 during the period of 2000 to 2007. The increased supply of land leads to the rapid growth of housing supply.

Housing Investment and Supply

During the period of 1999 and 2007, the investment on real estate development increased by 21.5 percent annually, on average, while investment on residential housing development increased by 22.9% annually.  It results in the dramatic growth in the floor area of the new construction.  For example, in 1999, there was only 188 million square meters of newly built  floor areas. Since then it has increased continuously every year and amounted  to 788 million square meters, an increase by 320 percent.

Housing Sales and Price

The boom in land supply and real estate investment and consequently increase in thefloor areas of new construction demonstrate the supply side forces and policies. But the demand for housing is reflected in the housing transactions and the quantity of housing consumptions.   As Figure 3 reveals, the total square meters of sold housing space increased from 130 million in 1999 to 701 million in 2007, an increase of 439 percent between the two time periods, indicating a strong demand for housing and  rapid development of a real estate market in China.

Although the total value of housing transactions increased dramatically during the period  of 1999 to 2007, the housing price per square meter did not experience a  considerable increase between 1999 and 2004.   According to Figure 4, the housing  price enjoyed a double  digit  increase  starting in 2004, with a growth rate of 18.7  percent. The housing price per square meter is nearly  doubled between 1999 and  2007.

II. Patterns of Urban Housing Consumption

In this section, we examine the characteristics of housing consumption, using the data from large-sample Urban Household Survey  in 2007 conducted  by  the  National Bureau of Statistic of China (NBS). This survey covers more than 600 cities in China with 520,000 responses to their  questionnaires. This data set is unique, because it reveals the conditions of the housing stocks in China instead of the new construction that only accounts for a portion of the total housing stocks.  

In this study, we focus upon 256   prefecture level cities with 250,000 responses. Various housing consumption  characteristics, in terms of dwelling size, property type  and tenure structure, owner occupied rate and housing value, are quantitatively analyzed in thissection.   However, this survey covers only formal housing in the urban areas and the informal housing such as temporary dwellings, villages in a city, and construction site shelters that are often occupied by migrant workers and low-income  population are not included.

Homeownership Rate

Homeownership rate is an important measure of the conditions of housing markets in a country. We follow the international standard by defining the homeownership rate as the ratio o owner occupied housing units to total housing units.   Based upon the 2007  Large Sample Household Survey data, we found that the owner-occupied homeownership rate reached 82.3% in 2007 in China. As Table 1 shows, this figure varies dramatically cross cities. Among 256 prefecture level cities in our sample, the owner occupied home ownership rates range from 34.8% to 97.8%. But a majority of the sample cities (about 69.1%) has an owner occupied home ownership rate exceeding the national level of 82.3%. Table 1 reveals that the average rate of the owner occupied housing for the four largest municipalities in China is 72.9%, lower than the provincial capital cities (76.9%) and the other prefecture level cities (85.9%). There are lower owner occupied homeownership in the  East and Northeast Regions than in the West and Central Regions.    It may well be likely that housing cost in big cities and along the east coast affects the owner-occupied ownership rate in the respective areas.

It is not surprising that like many other countries, the owner occupied homeownership in China is highly correlated with household income as well. Figure 5 reveals that among the seven income groups defined by Chinese Statistical Bureau, the owner occupied homeownership rate for the lowest income group is 72.9% while  the highest income group has 87.4% rate, about 14.5 percentage point higher. The middle income group has a 83.5% owner-occupied home ownership rate, about 1.3 percentage pointer higher than the national average rate. By comparison, American homeownership rates based upon U.S. Census Bureau in 2000 was 66.2%. It suggests that Chinese housing reform started in 1998 has resulted in a higher owner occupied homeownership rate, a sign of positive outcome and great success in promoting homeownership in China.

Quantity of Housing Consumption

In addition to the homeownership rate, the quality and quantity of household housingconsumption  can reflect the conditions of the housing markets.   According to the 2007 Large Sample Household Survey, the  average  construction  floor area of  a  dwelling size  is 84.5 m2per  household,  equivalent to 63.4 square meter of usable living floor area per household. Based upon the average family size of 2.98 person per household in 2007, it can be calculated that average construction floor area and usable floor area per capita is 28.3 square meter and 21.3 square meter, respectively. It is consistent with the figures  reported in China Statistical Abstract 2007 that the per capita residential construction floor area of 26.1 and 27.1 square meters   in 2005 and 2006, respectively.   Figure 6 shows that the lowest 10% income group occupies 67.8 square meter of construction floor area per household unit, on average,  but the highest 10% income group of households consumes about  107.3 m2per unit, on average, indicating a  strong correlation between household income and the quantity of   housing consumptions.

By International comparison, the housing consumption  of the lowest 10 percent income group which has 67.8 square meter construction floor area or 50.9 square meter usable living floor area, exceeds the housing  consumption  of the low and middle income group in Singapore of an average usable floor space of   45 square meter per household unit. It indicates  that  there does not exist a problem of overcrowdness at the formal housing market in the Chinese urban areas. But it does not reflect the housing consumption  and conditions at the informal housing markets for the migrant workers and low-income mobile population.   

Housing Tenure Structure

Table 2 reports the property type and tenure structure of the housing stock, according to 2007 Large Sample Housing Survey. The market oriented commercially provided  commodity house and rental house accounts for 40.1 percent of total housing stock. The privatized state owned houses is about 34.2 percent of the total housing stock,  affordable housing subsided by government and the state owned public rental housing  account for 3.9% and 7.0 percent, indicating an inadequate government support for low-income household in the area of housing consumption.

Housing Market Value

2007 Large Sample household Survey reports self-estimated housing value of eachhousehold. Based upon the data, we calculated that the estimated mean market value of all type of residential housing is 281000 RMB. Calculated by the mean floor area, the estimated value is 3325 RMB per square meter. The housing market value varies by region and jurisdictions.   Not surprisingly, the four largest municipalities have an  average of 466900 RMB  estimated  market value, followed by capital cities of  270,500RMB and prefecture-level cities of 201700RMB. But the estimated housing  market value for the East Region is more than the twice of that for Central and  Northeast Region in China, posing political challenges for assisting the urban poor in the big urban areas and East regions with their basic housing consumption.

The following table suggests that the higher income group, the higher estimated  housing value, demonstrating in the positive income  effect on the   housing consumption.   However, the housing value also varies by property type and housing tenure. The most expensive house is commercial house which has an average price of 400000RMB, followed by  affordable housing (304000RMB) and  original  private house (250000RMB). Public funded rental house has a lowest estimated housing  value of 190000RMB.

III. Housing Affordability among Chinese cities

In recent few years, most of Chinese cities have experienced rise of housing prices in various degrees, which raises the problem of housing affordability as a major policy concern. Based on the Large-sample Urban Household Survey in 2007 conducted by NBS, we employ the indicators of Housing Price to Income Ratio (PIR) and Housing Affordability Index (HAI) to evaluate housing affordability in 256 prefecture-level cities in China.

Housing Price to Income Ratio

The housing price to income ratio (PIR) is the basic affordability measure for housing in a given area.  It is generally the ratio of  median  house prices to median family income.  In the Global Urban Observatory (GUO) of UN-HABITAT, PIR is one of urban indicators[1]. UN-HABITAT regards ratios of 3 to 5 as “normal” or satisfactory. Demographia  conducts  housing affordability survey  annually that covers more than 200 markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States. PIR is an important indicator to evaluate housing affordability across  cities or countries. Housing affordability is rated as 4 categories based the value of PIR:  If PIR  is equal to or greater than 5.1, the rating is  “Severely Unaffordable”; If PIR ranges from 4.1 to 5.0, the rating is “Seriously Unaffordable”; If PIR ranges from 3.1 to 4.0, the rating is “Moderately Unaffordable”; If PIR is equal to or below 3.0, the rating is “Affordable”. Table 4 demonstrates the new survey results of Demographic at 3rdquarter  of 2008. Among 265 cities surveyed, the highest value of PIR is 9.6, while the lowest  one is 1.8. There are 64 cities whose housing  affordability  market is rated as  “Severely Unaffordable”. The PIR for U.S. from the sample of 175 cites surveyed, is 3.2, falling in the category of “affordable” and only 22 percent of the surveyed cities are seriously unaffordable or severely unaffordable.

Based on the  Large-sample Urban Household Survey  in 2007 conducted  by NBS, we  calculate  PIR for China as a whole and for each of 256 prefecture-level cities in China as shown in Table 7 and Table 8. The results indicate that the median price income ratio (PIR) in China in 2007 is 5.56, and the mean PIR for all the cities in China is 6.46. Both the figures go beyond the “normal” or satisfactory level defined  by UN-HABITAT. They fall in the category of “Severely Unaffordable”.  By studying the price-income ratio for 265 prefecture cities, we  find that the median PIR is 5.21 and the average PIR for the sample cities is 5.54. As Table 6 shows, among 256 prefecture-level cities, only 10 percent of the cities are affordable with PIR below 3.0. Nearly 52 percent of all the prefecture-level cities in China are suffering from “Severely unaffordable” problem, and about 21 percent of the cities are “seriously unaffordable”. In comparison with U.S., according to Demographia (2009), only 9 percent of 175 American cities had the rating of “Severely Unaffordable” and 13 percent of surveyed cities is “Seriously unaffordable”, but ABOUT 44 percent of cities are “Affordable”.

Housing Affordability Index

Housing affordability index (HAI) is published monthly by the National Association of Realtors (NAR) since 1981. The HAI assumes borrowers make a 20 percent down payment and that the maximum mortgage payment is 25 percent of gross monthly income for the household.   The HAI index has a value of 100 when the median-income family has sufficient income to purchase a median-priced existing home. A higher index number indicates that  more households  are affordable  to  purchase a home.

According to the statistics of NAR, HAI in US from 2006 to 2008 is respectively 106.1, 111.8 and 128.6[3]. Figure 8 demonstrates the variation of HAI in Australia[4].  The number of HAI decreases from 135.1 at 1th quarter 2005 to 103.1 at 1th quarter 2008, which means the housing becomes more unaffordable to households. At 1th quarter 2008, the HAI value in several capital cities is lower than 100, such as Sydney (94.3), Brisbane (81.6) and Pace (90.7).

Based on the Large-sample Urban Household Survey in 2007 conducted by NBS, we  calculate HAI in 256 prefecture-level cities in China. The parameters used in the formula of HAI are set as follows: the down payment is 30%, the maximum mortgage payment is 25 percent of gross monthly income for the household, the lending rate is 6.84%, and the length of maturity is 30 years. Therefore, HAI in 256 prefecture-level cities in 2007 is demonstrated in Table 7. The value of HAI in China is 81.8 in 2007, which is lower than 100, indicating  severe unaffordability for the households living in the prefecture-level cities, on average. Only 94 cities in 256 prefecture-level cities have HAI values more than 100. About 63.3 percent of the prefecture-level cities have a housing affordable index (HAI) below 100, indicating the households in those cities with median income does not have sufficient income to purchase a median-price existing house in the city of their residence.

Table 7 reveals that the Housing Affordable Index is lowest in the prefecture-level cities in the Eastern Region. The 35 largest cities in China have a median HAI of 72.8 but the other cities have a HAI of 90.9, about 18 points lower, indicating that housing affordability issue exists in 35 largest cities and East Coast Region. The housing reform may have made households of large  cities less affordable for housing consumptions.

IV. Major Findings

This paper attempts to study the trends, patterns and affordability of Chinese housing market since the launch of housing reform in 1998. The data from statistical abstracts, Ministry of Finance, and 2007 Large Sample  Household Survey are collected and analyzed. There are the following major findings:

1.  During the period of 1999 to 2007, there is a significant increase in land supply,  up by 235 percent. The investment on land development experiences  a double digit growth every year except for 2004.   The increased supply of land leads to  the rapid growth of housing supply.

2.  During the period of 1999 and 2007, the investment  on real estate  development increased by 21.5 percent annually, on average, while  investment on residential housing development increased by 22.9%  annually. As a result, the square meters of newly built floor areas experienced a rapid increase and amounted to 788 million square meters, up  by 320 percent between 1999 and 2007.   It suggests that the Chinese government’s housing policy has encouraged the investment on the real  estate industry in an attempt to increase housing supply.

3.  Due to the urbanization and rapid increase in disposable income, the sales of total square meters of housing space increased from 130 million in 1999 to 701 million in 2007, an increase of 439 percent between the two periods. As a result, the housing price also increased considerably, especially since the year of 2004.   The price of housing per square meter has nearly doubled between 1999 and 2007.   It demonstrates a steady and strong demand for housing and rapid development of a real estate market in China. 

4.  Based upon the 2007 Large Sample Household Survey, data, we found that the homeownership  rate in China  reached 82.3% in 2007. However, there is a considerable variation by city. Among 256 prefecture level cities in our sample, the owner occupied home ownership rates range from 34.8% to 97.8%. A majority of the sample cities (about 69.1%) has an owner occupied home ownership rate exceeding the national level of 82.3%. Chinese homeownership rate exceeds many developed countries including U.S. (about 67%).

5.  After  analyzing data from the 2007 Large Sample Household Survey, we found that the  average  construction  floor  area of a dwelling size is 84.5 m2 per household,  equivalent  to 63.4 square meter of usable living floor area per household. By calculation, average construction floor area and usable floor living area per capita is 28.3 square meters and 21.3 square meters, respectively.  The total Constructed floor areas range from 67.8 square meters per household for the lowest 10% income  group  to 107.3 square meters for the highest 10% income group. By comparison with Singapore, there does not indicate an over-crowdness of living spaces for an average household.

6.  The market oriented commercially provided commodity house and rental house accounts for 40.1 percent of total housing stock. The privatized state  owned houses is about 34.2 percent of the total housing stock, but the affordable housing  subsided by government and the state owned public rental housing account for 3.9% and 7.0 percent, respectively, indicating  an inadequate  government  support for low-income household in the area of housing consumption.

7.  The estimated average market value of all type of  residential  housing  stock is 281,000 RMB in China, about 3325 RMB per square meter in 2007. It is apparent that the four largest municipalities in China have an average of 466,900 RMB estimated   market value, followed by capital cities of 270,500RMB and  prefecture-level cities of 201,700RMB. The estimated housing market value for the East Region is more than the twice of that for Central and Northeast Region in  China, indicating that residents in big cities and the East Coast Regions enjoyed a rapid accumulation of asset values in China.

8.  The median price income ratio (PIR) for China as a nation is 5.56, and the mean PIR for all the cities in China is 6.46, putting China in a category of   “Severely Unaffordable”   according to the definition of UN-HABITAT. The median price-income ratio for 265 prefecture cities is 5.21. Only 10 percent of the cities are affordable and nearly 52 percent of all the prefecture-level cities in China are suffering from “Severely unaffordable” problem, and about 21 percent of the cities are  “seriously unaffordable”. By comparison, only 9 percent of 175 American cities had the rating of “Severely Unaffordable” and 13 percent of surveyed cities is ranked as “Seriously unaffordable”. More than 44 percent of American cities in  the sample are rated “Affordable”. It suggests that the housing affordability has become a big problem for Chinese homebuyers, even though it is calculated using the housing stock data. If the newly constructed housing data is used, the housing affordability problem can be much more severe.

9.  By using international standard calculation of House Affordable Index (HAI), we found that the value of HAI in China is 81.8 in 2007, indicating severe unaffordability for the households living in the prefecture-level cities, on average.  About 63.3 percent of the prefecture-level cities have a housing affordable index (HAI) below 100, indicating the households in those cities with median income do  not have sufficient income to purchase a median-price existing house in the city of their residence.   The bigger the cities are in terms of population size, the lower the value of Housing Affordable Index. 

10. This  study demonstrates that the housing reform in 1998 has resulted in large increase in land supply, housing supply as well as housing consumptions. But the side effects of this housing sector privatization have caused inequality  among income  groups  and regions. The low-income group has been left out of this historical reform and become losers. The housing stock has become severely unaffordable in China, posing  risks and challenges  that may threaten the sustainability of economic growth and the stability of the society. It is certainly contrary to the goal of becoming a harmonious society for China. It shall be the focus for Chinese government in their design for a sound housing policy in China.

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