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Housing Affordability in China’s Cities: An Assessment

Rongrong Ran

Peking University – Lincoln Center

Institute of Real Estate Studies, Tsinghua University of China

Joyce Yanyun Man

Peking University – Lincoln Center

College of Urban and Environmental Sciences, Peking University

Housing affordability is an important indicator that is employed to evaluate the housing market in various countries or regions. It reflects the relation between housing costs and family income. According to Stone (2006), housing affordability is “an expression of the social and material experiences of people, constituted as households, in relation to their individual housing situations.”  Within income constraints, housing affordability reflects a trade-off between expenditure on housing and other expenditures.

Many countries (such as the USA and Australia) have established regular, periodic systems which monitor the affordability of housing at monthly, quarterly, or annual intervals. The most commonly used indicators are the Housing Price to Income Ratio (PIR) and the Housing Affordability Index (HAI). This article shall employ these two measures, as well as data from the Large Sample Urban Household Survey in 2007 conducted by the National Bureau of Statistic of China (NBS) , to evaluate urban housing affordability in China.

 Price to Income Ratio (PIR)

The Price to Income Ratio (PIR) is the ratio of the median market value of all urban housing to median family income. In UN-HABITAT’s Global Urban Observatory (GUO) database, PIR is listed as a key urban indicator.  In the 2001 Istanbul+5 meeting, UN-Habitat produced a comparison of the PIR in six major regions (see Table 1). According to UN-HABITAT, a PIR of 3-5 is considered reasonably affordable.

The organization Demographia has, since 2005, produced a survey of over 200 cities in developed countries, using PIR as an indicator of housing affordability.  Demographia characterizes the housing affordability of cities thus:

•       A PIR of less than 3.0 (including 3.0) is affordable

•       A PIR of 3.1-4.0 is moderately unaffordable

•       A PIR of 4.1-5.0 is seriously unaffordable

•       A PIR of 5.1 and above is severely unaffordable

The results of the Demographia survey are shown in Table 2 below. Among some 265 cities, the lowest PIR was 1.8, while the highest was 9.6, and some 64 cities were categorized as seriously unaffordable.

Here we use data from the Large Sample Urban Household Survey in 2007 conducted by NBS to calculate the PIR of 256 prefecture-level cities in China. The results show that national PIR for China is 5.56, higher than UN-HABITAT’s 3-5 range of acceptable PIR and falling in Demographia’s severely unaffordable category.

The 256 prefecture-level Chinese cities fell in the range of 1.92 to 15.46 in terms of PIR, the lowest being Jilin’s Siping, and the highest Shaanxi’s Yulin.  According to Demographia’s standards, only 10.2% of 26 cities were affordable. More than half (51.9%) of the cities were seriously unaffordable, see Table 4.

It is important to note that PIR measures the median market value of all housing against the median household income. The extant indicators used in China, on the other hand, mostly employ the following formula: average sales price for new housing multiplied by per capita floor space and divided by average disposable income. This formula is different from the definition of PIR. “PIR” calculated by this method tends to be much higher than the level of PIR in cities internationally. For example, according to Gao Yongfeng (2009)’s calculations, the average ratio for China’s cities was 15 in 2007, with Beijing at 23 and Shanghai at 17.  The International Institute for Urban Development (IUD), Beijing’s Leadership Intelligence Center’s analysis of 16 Yangtze Delta cities gave figures of 15.61, 11.25 and 9.26 for Hangzhou, Shanghai and Ningbo, respectively—higher than the figures given by this article.

 The Housing Affordability Index

The Housing Affordability Index (HAI) was formulated by the USA’s National Association of Realtors in 1981, and is presently widely used both academically and by commercial consultancies. The HAI is published monthly, monitoring change in affordability over time.

The HAI index assumes a benchmark of affordability based on: the median housing price, a 20% down payment, and a 30-year mortgage with equal payments representing 25% of income.  The benchmark value is 100, such that a value above 100 is considered affordable and below 100 is considered not affordable.

According to the statistics of the National Association of Realtors (NAR), the indicators for affordability in the US for 2006, 2007, and 2008 were 106.1, 111.8 and 128.6.  Data from the HAI-Commonwealth Bank’s annual survey of housing affordability show the affordability of housing in Australia and indicate a general decline in affordability over time. During the first quarter of 2005, the HAI value was 135.1, while by 2008 HAI had fallen to 103.1, and many state- and territory-level capitals had an HAI below 100, e.g. Sydney (94.3), Brisbane (81.6) and Perth (90.7)

This article employs the method the NAR’s HAI calculation to create a new benchmark based on the situation in China, i.e. 30% down payment, a 30 year mortgage, monthly mortgage payments equal to 25% of income, and the 2007 interest rate of 6.84% (loans of five years or more).

The results can be seen in table 5. In 2007, the national housing affordability index stood at 81.8, which indicates that, as a whole, China’s housing is unaffordable. Of the 256 cities surveyed, only 94 had an affordability index higher than 100. As was the case in Australia, China’s provincial capitals had an index lower than the national average, as did the 35 large cities. Moreover the survey indicated regional differences, with affordability lowest in eastern cities.

 Conclusions

 Housing affordability is an important indicator that is employed to evaluate the housing market in various countries or regions. Two commonly used indicators, in terms of PIR and HAI, are normally based on the total housing stock, while at present the domestically used indicators rely on the average sales price of new housing, so that the domestic indicators tend to underestimate housing affordability.

Using the data from the “Large Sample Urban Household Survey in 2007 conducted by the National Bureau of Statistic of China”, this article has employed international indicators—the PIR and the HAI—to evaluate the affordability of 256 prefecture-level cities in China. We have found that:

The national PIR stood at 5.56 in 2007, while the HAI was 81.8. This indicates that, in terms of international standards, housing is relatively unaffordable. The range in PIR for the 256 prefecture-level cities was 1.92-15.46, while the range for HAI was 29.4-236.4, indicating a large disparity in terms of affordability.

The accurate and rational calculation of affordability helps us not only to identify salient housing issues and to implement housing security measures, but also helps families to make informed decisions when purchasing housing. Therefore, we believe that it is necessary for China to begin to regularly monitor HAI and PIR to evaluate the housing market.

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