China's Housing Development Strategy in the New Normal

Ting SHAO
Development Research Center of the State of Council, China
(DRC)
2016-1-13
China’s Housing Development Strategy in
NEW NORMAL

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
32.91
37.09
0
5
10
15
20
25
30
35
40
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Average Housing Area per Capita, in square meters
Urban(square meters per person) Rural(square meters per person)
Database: National Bureau of Statistics of China

Housing sector is crucial to China
6.00%
25.60%
17.90%
0%
5%
10%
15%
20%
25%
30% 2005-03
2005-07
2005-11
2006-03
2006-07
2006-11
2007-03
2007-07
2007-11
2008-03
2008-07
2008-11
2009-03
2009-07
2009-11
2010-03
2010-07
2010-11
2011-03
2011-07
2011-11
2012-03
2012-07
2012-11
2013-03
2013-07
2013-11
2014-03
2014-07
2014-11
2015-03
2015-07
ratio of real estate value added to GDP ratio of real estate investment to gross fixed investment

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…
Database：Working paper of PBOC, 2015

But housing sector is slowing down in
recent years
-20%
-10%
0%
10%
20%
30%
40%
50%
floor space under construction floor space started floor space completed
In percent, Quarter-on- Quarter

Real estate investment growth is dragging down
GDP growth rate
14.2%
6.9%
13.71%
16.15%
33.16%
10.49%
2.6%
0%
5%
10%
15%
20%
25%
30%
35%
0%
2%
4%
6%
8%
10%
12%
14%
16%
GDP growth rate Real estate investment growth rate(right)

Part 2: Challenge
—  On the surface:
—  Overcapacity and Overprice
—  Underlying challenge:
—  Local governments over-reliance on housing sector
—  Demographic change
—  Decelerating urbanization rate

Note: Inventory ratio=floor space unsold/floor space sold (month)
621.69
696.37
1.38
8.08
4.9
0
100
200
300
400
500
600
700
800
0
1
2
3
4
5
6
7
8
9
floor space unsold(million square meters,right) Real estate Inventory ratio（month,left)
Linear (Real estate Inventory ratio（month,left))
The no. of months it takes to sell all inventory housing is
steadily increasing

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

The no. of years it takes to sell all existing AND future
inventory housing is rapidly increasing
Note: Inventory ratio=（floor space unsold+floor space under construction）/floor space sold (year)
3.6
6.5
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014
Year

Note: only includes newly developed houses
Tier 1 cities: Beijing, Shanghai, Guangzhou, Shenzhen
Price divergence among cities: prices in Tier
1 cities more resilient
-10%
-5%
0%
5%
10%
15%
20%
25%
Tier I Tier II Tier III/IV 70 large and medium cites
In percent, Month-on-Month

Yardstick #1: Ratio of house price to
income
165.4
51.3
94
68.6
40
60
80
100
120
140
160
180
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
China USA Japan
To make data comparable across countries, we
index long-term average of house price/income
ratio=100
Database:The Economist; OECD
Note: income per person after tax

Why is China’s house price/income ratio dropping?
Because Tier I cities are actually outliers – house prices in
most cities are affordable
Shen zhen
Bei Jing
Shang hai
y = 0.5386x - 4622.3
R² = 0.46472
-
5,000
10,000
15,000
20,000
25,000
30,000
10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000
NewHousingUnitPrice(RMB/sqm)
Per Capita Disposable Income (RMB)

Yardstick #2: Ratio of house price to
rent
132.2
141.5
144.8
50
70
90
110
130
150
170
1970.Q1 1980.Q1 1990.Q1 2000.Q1 2010.Q1
China USA Japan
To make data comparable across countries, we
index long-term average of house price/rent
ratio=100
Database:The Economist; OECD; ONS; Standard &Poor;Thomson Reuters

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
22.02
77.98
28.27
71.74
45.95
54.05
14.87
85.13
0
10
20
30
40
50
60
70
80
90
Ratio of Central gov's revenue Ratio of Local govs' revenue Ratio of central gov's spending Ratio of Local govs' spending
1993 2014

Local government relies on real estate too
much
2.44%
9.19%
75.9%
64.32%
0%
10%
20%
30%
40%
50%
60%
70%
80%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
real estate tax deed tax land leasing revenue
In percent, Ratio of local government’s revenue

Local governments restrict residential land supply
0.41
0.24
0.41
0.25
0.18
0.51
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Industry real estate Infrastructure and others

Cheap industrialization, expensive
urbanization
y = 0.5856x - 9587
R² = 0.39077
y = 0.0351x - 234.33
R² = 0.30257
-5,000
-
5,000
10,000
15,000
20,000
25,000
30,000
10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000
LandPirce(RMB/sqm)
Per Capita Disposible Income (RMB)
Residential Land Price Industrial Land Price
100 cities, 2013

Demographic change
2010 housing census showed 25-39 age group mostly likely to buy a house
26.92
22.34
23.4
70.4
74.4
73.41
68
69
70
71
72
73
74
75
20
21
22
23
24
25
26
27
28
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Age:25-39(left) Age:15-64
In percent, ratio of urban population

Boosting urbanization rate will not offset aging population,
although the effect of new “two-child” policy remains to be
seen
1.61
1.04
0
5
10
15
20
25
30
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Increase of urban residents(million,right) Increase of urbanization rate(%)

Migrant workers move to cities at decreasing rate
3.40
0.00
-4
-3
-2
-1
0
1
2
3
4
155
160
165
170
175
180
Peasant workers(million,left) 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
-5%
0%
5%
10%
15%
20%
25%
30%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
growth rate of residential housing price
oct.2004,27 bp increase of
interest rate
march,2005,down payment ratio
from 20% to 30%
April and August, 2006,54 bp
increase
april, increase loan rate for
two houses
sep,2005,(ghten

Housing
trust 108
bp
increase

down
payment

50%

march
to
may
,increase

requirement
rate
150
BP
sep,oct,
reduce
81

BP,
downpayment

is
20%
Jan,increase
the
loan

rate
and
down
payment
Nov,
reduce
40

bp

loan
rate
Jan,
down
payment

over
40%

E.g. Accumulation effect of interest rate change
　 2014 2015
House Price 300,000 341,785
30 year fixed mortgage rate 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

Land supply matters
-60%
-40%
-20%
0%
20%
40%
60%
80%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
growth rate of housing land supply
growth rate of housing price（one year lagged，right）

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
34.5
47.5
71.8
55.8
45.3
51.8
53.8
0
10
20
30
40
50
60
70
80
0
2
4
6
8
10
12
14
16
2009 2010 2011 2012 2013 2014 2015*
new construction of affordable house(million units) new construction of house(million units) 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 InvestmentTrust (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

THANK YOU!
Welcome questions and comments
shaoting@drc.gov.cn

China's Housing Development Strategy in the New Normal

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