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M. Wołangiewicz: China’s Real Estate Bubble – part 2

Chapter II

CHINAS HOUSING SYSTEM

2.1. The urban housing sector before the reform between 1949 and 1995

Past policies connected with political intervention have created a situation in which the Chinese housing sector was massively controlled by the government. Between 1949 and 1978 public rental housing was the predominate form of housing provision in urban China. Beside the superiority of socialism over capitalism, there were also economic reasons of this predominance: low housing affordability, the low capacity of the construction sector, the importance of ensuring productivity of SOE workers and the need to accommodate growing urban residents cheaply (Huang 2004; Zhang 2000). In fact, the state acted as a landlord and developer who provided housing at extremely low rental standards, determining at the initial level that the price covers the maintenance costs. This resulted in a mean rent for public housing of 0.3 yuan per square meter of living space (Zhang 2000).

“The rent level was fixed for a long period without any corresponding increase to match the growth of household income and economic development. On average, rent accounted for about 1 percent of an average worker’s annual income (Wang & Chen 1991) in the mid-1950s, and it was too low to cover even the cost of maintenance (Zhang 1996). Rent in this system had less economic significance and was characterized as the natural welfare of public housing. In the old-style public housing provision, the allocation system involved two stages: the state allocated public rental housing to work units, then the work units distributed the housing to individual households (Yang & Chen 2014).”

Housing financed solely by the state through budgetary funding placed a tremendous financial burden on the government. During talked-about time, the annual income from rents was about 1 billion yuan, whereas the government spent an average of 25 billion yuan on new housing construction and another 10 billion yuan on maintenance (Cui 1991). This, in turn, resulted in low investment in housing and a continuous housing shortage. For example, the living area per capita in urban China decreased from 4.5 m2 in the early 1950s to 3.6 m2 in the 1970s (Liu 1998). What is more, the connection between work units and housing services also brought about a low level of labor mobility and gender equality (World Bank 1992).

Before the Opening Policy and market-oriented reforms conducted by Deng Xiaoping in 1978, cities in PRC were just the places where socialist state-owned work units (danwei – an organization that a person is working for; Chinese use the term of gongzuo danwei, literately in English, work unit) were located (urban land in turn was allocated to work units or government organization for free before land reform of late 1980s) – employees could get houses allocated to them as welfare; work units were responsible for their health treatment and the retirement pay (Pei 2002). At the same time, while land in the urban areas was owned by state, land transactions as a manifestation of capitalism were forbidden after 1949. In consequence, most housing was built under the public sector. It was estimated that between 1949 and 1990 only 12.6 percent of housing was built by the private sector (individual families), most of them after 1978 (Tang & Xie 1992).

Described above housing policy has had severe consequences. First of all, as pointed put by Zhou Y., “although urban public housing is under heavy subsidization, the policy sacrifices housing for other productive capital investments (Chen 1995).” What follows, with increasing urban population, shortages of public housing in urban areas have occurred. In fact, in the late 1970’s they became prominent “the urban per capita living space decreased from 4.5 square meters in the early 1950’s to 3.6 square meters in the late 1970’s (Li 1998)”; urban housing shortage was more than 8.69 million, accounting for 47.5 percent of total urban housing.

Secondly, it has immobilized the urban labor force which has been tied to both hard-won and low-rent apartments. This system was so powerful in terms of mobility due to the existence of hukou the policy of registering residents and forbidding migration (dated back to 200 A.D.) to prevent rural-urban migration and to ensure that the limited production will be allocated to specific groups of people. In consequence, labor mobility in China was minimal and amounted to one per cent of the “non-agricultural” labor force in 1980’s (World Bank 1992). That has caused immense disparities between the rural and urban areas as far as housing and other facilities are concerned.

Thirdly, the system of 1949-1995 has entailed corruption inequity. Based on the red tape, distribution process has promoted the use of power to obtain housing by those who has not necessarily deserved it (Zhou 1999). Last but not least, state-centered urban politics, which has been functioning as welfare distribution for the socialist state (being simultaneously just the extension of state power in the city), and following lack of competition between house constructors (developers) has prevented development of housing in China.

2.2. The urban housing sector after the reform

“A new historic era in China began in December 1978 when the Third Plenum of the Eleventh Central Committee was held in Bejing. After years of economic stagnation and political turmoil, the government has recognized the deficiency of the old over-centralized, overextended, and stringent socialist regime at the end of 1970’s. From then on, China has changed attitudes and started a period of transition away from centrally planned economy (Zhou 1999, p. 10-11).

In April 1980, Deng Xiaoping in his speech to central government leaders about the must of following the commoditization in the reform of the urban housing system said:

“[We] need to consider a series of policies for urban housing construction and allocation. Urban residents should [be allowed to] buy houses, … [We] must adjust the [public sector] rent according to house building costs, and make people think buying is worth more than renting. (…) When increasing rent, low income workers should be subsidized. Housing policy should encourage the private and public sector to work together and the private sector may also participate in housing construction (Deng 1980).”

The reform of urban housing system began. Words of Xiaoping “sowed the seeds for the subsequent 20 years of housing reform and paved the way for various experiments (Yang & Chen 2014).” In 1980 and 1982, several Chinese cities started pilot schemes to sell the public housing stock to setting tenants, in the beginning for the market price and later on at a subsidized price: experiments was conducted in different major cities with a focus on reorganizing of housing production and promotion sales to ensure a sufficient return on housing investments. Over the trial stage that followed (between 1980 and 1988), cities such as Changzhou, Xi’an Nanning, Shashi, Zhengzhou, Siping and Yantai were selected for the implementation of rent increase and public housing sales experiments. Other cities followed up this pilot. However, because of low affordability and the lack of a financial market, these attempted reforms did not successfully achieve their objectives in the majority of the trial cities

During that time the government was focused on marketization rather than privatization. For this reason, the reform was focused on increasing efficiency of the public housing by leasing out the use rights of public property. Hence, state and local owned enterprises were forced to compete with each other on the market. Simultaneously, however, the freehold of these enterprises was still held by the local or central government (Zhou 1999). What follows, housing shortages, poor management and insufficient investments commonly existed, despite the great number of housing that was built after 1978 (Wang & Murie 1996). Some of them were even more prevalent. “Private housing occupied 18.7 percent of total housing floor area in 1990, which did not change significantly from 17.7 percent in 1982. The only significant change was that the work-units gained more control over public housing than local authorities (Zhou 1999).” Mean floor space per capita in urban areas was 6.3 square meters per capita in 1988 (State Statistical Bureau 1993).

In 1988, 6 years after the reform pilot, the State Council issued document No. 11, “Implementation Plan for a Gradual Housing System Reform in Cities and Towns”, and what follows, the housing reform was officially announced. The aims of it were: “commercialization” and “shift from in-kind allocation into market allocation” (State Council 1988). The implementation plan identified the nature of housing as commodity-based and paved the way for housing reform to target housing marketization (private housing ownership) – in the document the central government encouraged more cities to implement the housing reform including housing stock sales and rent increase.

What is even more, by the way, the 1988 Constitutional Amendment granted the private economy the right to develop. China’s Constitution the new Article 11 was added. It reads:

„The State permits the private sector of the economy to exist and develop within the limits prescribed by law. The private sector of the economy is a complement to the socialist public economy. The State protects the lawful rights and interests of the private sector of the economy, and exercises guidance, supervision and control over the private sector of the economy (emphasis added).”

Despite this, there were still 4 million urban households living in accommodations with a mean per person floor of 4 square meters in 1994. Moreover, among them, 400,000 households had a mean floor space of 3.5 square meters per capita (Sun 1994).

In 1994, after the third national housing reform conference was held in Bejing, the State Council issued another national reform document to lay out the whole housing reform assumptions. The plan titled “the Decisions of the State Council on Deepening Urban Housing System Reform” was primarily about defining the relations between the government (state), work units, and workers, and contained few detailed explanatory documents including: the Housing Provident Funds (HPF), a rent reform (rents were increased and meant to cover all cost of maintenance), a housing financing scheme, the Economic Comfortable Housing (ECH) scheme and a subsidized home ownership scheme.

“A series of policies were launched to promote the supply and consumption of commodity housing. The for-profit land use provision became an important source of income for local governments. Moreover, a pre-sale method was introduced. This allowed the developers to sell the dwellings before completion (SCC, 1994). The method allowed real estate developers to use the money of buyers to construct housing therefore enlarged the provision substantially. On the demand side, there is a savings fund – called Housing Provident Fund – which started in Shanghai and was spread out to the whole nation. This is a compulsory housing saving policy and it allowed contributors to get loan with lower interest rate (State Council, 1994). The mortgage market was open to all kinds of lenders, the limitations of maxima loan and maximum loan period were loosened, and the requirement to a down payment was cancelled (State Council, 1998). (…) [Moreover] international investors, especially overseas Chinese, began to invest in tertiary industries such as real estate and finance in late 1990s, the real estate market became heated. Chinese citizens gradually realized the investment value of owning a dwelling. Both commodity housing consumption and the public housing sale accelerated in this period (Deng et al. 2015).”

In effect, total housing investment has increased from 162 billion yuan to 301 billion yuan with a growth rate of 85.80 percent from 1990 to 1995. The overall housing quality of Chinese urban households, including living area and facilitates, also did improve substantially in this period. Respectively, the living space per person has significantly improved, from 4.5 square meters in 1950 to 13.7 square meters in 1990 (Yang & Chen 2014). However, the inequality of housing distribution went up in this period, as well. Moreover, the reform in this period did not manage to shift the system away from the work unit (Wang 2001). “Thus, this period is referred to as the >>double-track<< stage, in which work units continued to build or purchase new housing for employees while the sitting renters were encouraged to purchase public housing rented from the work units at highly subsidized prices (Yang & Chen 2014).”

At the same time, the buyers of public housing were restrained from reselling, which limited the process of the privatization. As stated by Deng et al. (2015), this appeared to be the paradox of China’s reform. The aim of the reform was to minimize the role of work units in welfare provision. Nonetheless, due to the absence of alternative welfare provision, employees still tend to acquire their welfare needs from employers rather than government (Zhang 2002). This meant that the role of work units has not been reduced and work units still have played a key role on the housing market. By the end of 1995, only 30.5 percent of public housing has been privatized. The privatization rate in major cities was even lower. For example, the privatized public housing rate in Beijing and Tianjin were 18 percent and 15 percent respectively. What is even more, most of the owners had only partial ownership of their houses (Zhang 1996).

From the start of the reform in 1978 to the official end of reformed housing system in 1998, China was in a dual housing system. Two kinds of housing tenure were provided in this period: the Reformed Housing (fanggai fang, or the privatized housing), and Commodity Housing (shang pin fang). In consequence, “[the] reform of urban housing turned out to be a chance for a particular group of urban residents to take advantage of the institutional change. The dual provision of urban housing resulted in a dual housing market. In this dual housing market, official workers in powerful work units benefited a lot while the rest of the population suffered. The difference in occupational status among residents in the socialist period resulted in a substantial difference in terms of living conditions and value of assets. The persons with higher status in the original socialist system maintained and even expanded their privileges during the reform period (Deng et al. 2014, p. 10).”

In short, since the 1990s, against the backdrop of decentralization, globalization and interurban competition involved in the transition process from state socialism to more market-oriented economy, urban governance in China has experienced thorough restructuring characterized by the urban entrepreneurialism (Wu 2002). From 1995 the new housing system changed from allocation to market driven. The workers had to buy the house they live in with a relatively low price, or rent it. Nevertheless, the reform did not lead to the total decomposition of the danwei institution, and what follows, the traditional “workplace-based welfare system” Housing provision, as well as other welfare goods including education, health care, and even commercial service, in urban areas were still mainly carried out by employers and secondarily municipality governments till almost the end of 1990’s (Zhou 1999).

The giant step in a housing policy towards a full marketization was made in 1998. To wit, in July 1998, the new State Council issued an official document titled “The Resolution on Continuing Urban Housing System Reform, Accelerating Housing Development.” It announced that welfare housing distribution would be postponed till the end of 1998 and completely replaced by monetary distribution, implicating a full marketization phase in housing reform. Subsequently, the government has officially forbidden work units to provide reformed housing to their employees (formal abolishment of the previous work-unit-welfare housing system). However, they continued to do so at much smaller scale (Deng et al. 2015; Zhou 1999).

The central government also vigorously encouraged residents either to buy housing from the market or to purchase their sitting public-sector housing from the SOEs before the end of 1998. In 1999, the Ministry of Construction published a document for the privatization of public housing. The paper stipulated that “all public housing owned by the local housing authority, except those being recognized as unsuitable for sale, e.g. historical housing, seriously dilapidated housing, and housing within office complexes, should be sold to sitting tenants who wish to purchase it; housing owned by individual work units, in principle, should be sold to employees who wish to purchase it.” For this purpose, certain policies were prepared to allow origin tenants to buy houses at reduced cost, allowing them to buy the property at its direct construction cost or at a “standard price” determined through the buyer’s years of employment and income (He & Wu 2009; Yang & Chen 2014).

“Local governments and particular work units were given the right to influence pricing and after 1 January 1999, all new residential housing units were to be sold on the open market with SOEs prohibited from building any more welfare housing for their employees. To promote privatization, the government further increased rents to make them less attractive and set up a new housing finance system to help individuals with mortgages. As a consequence, within a year and a half, more than 60 percent of urban public housing was being sold to individuals (…). By the 2002 [in turn], 80 percent of public housing had been sold to its occupiers (Yang & Chen 2014).”

Summing up, the 1998 housing reform entailed fundamental changes in Chinese urban housing system, shifting the key role of government from directly providing housing to separate housing distribution based on employment and the social benefit system. The concepts “economically affordable houses” and “commodity houses were created”. Economically affordable houses have been usually sold with 3 to 5 percent margin and targeted at low- and medium- income households. Commodity houses, in turn, have been bought or rented at prices determined by the market.

Hence, there are three types of shelters for Chinese households from that time: commodity houses, economically affordable houses, and rental properties. “In 2010, economically affordable houses accounted for merely 3 percent of all homes built, compared to nearly 25 percent at its peak in the late 1990s. Urban households can purchase either economically affordable or commodity houses. To qualify for the lower-cost category, applicants must have hukou and meet various requirements, including those pertaining to average living area, household income, and household net assets” (Barth et al. 2012). Nowadays, more than 80 percent of homes are owned by private persons, which is the real evidence of successful privatization policies during the 1980s and 1990s.

That is, the reform framed a basic urban housing system model in China based on home ownership (Wang 2007). Moreover, the reform has been indeed successful in increasing ownership housing. However, it has also led to bigger housing inequalities, spatial segregation and urban poverty (Lee & Zhu 2006).

2.3. The urban housing system and development in the Post-reform Era

“Housing reform paved the way for the development of a market-oriented housing sector in urban China, and the Chinese housing market has grown with dazzling speed for more than a decade China’s economy (Yang & Chen 2014).” After 1998, the strategy of Chinese housing construction changed from quantity to quality and the residential environment (Pei 2002). That is the reason why residential housing industry has played a very important role in mainland Chinese economy. Development of that industry and following increase in housing supply, in turn, has led to significant improvements in housing conditions for households in urban areas. For instance, the living space per person in Chinese cities has grown an average of 1 squared meter annually since 1998. By the end of 2009, the average space per person in urban China was about 30 square meters – four times more than recorded in 1978.

Simultaneously, since 1991, prices of houses have maintained a strong upward tendency (with the exception of a slight downward price adjustment in 2008 because of the shock of the global financial crisis). “From 2002 to 2010, the housing prices in 35 major Chinese cities increased by 12.68 percent annually on average, which is 4.09 percent higher than the corresponding rate from 1998 to 2002. In large cities such as Beijing and Shanghai, housing prices rose even higher than the national average, where the annual price inflation rates were 15.76 and 14.93 percent respectively from 2002 to 2010 (Yang & Chen 2014).” Correspondingly, from 1999 to 2011, the GDP of the real estate industry increased 20 percent yearly. Its contribution in the total Chinese economy increased in turn from 4.2 percent to 5.7 percent. During this time, housing consumption increased significantly, the home ownership rate became higher and housing quality improved. From 1999 to 2011, the average housing area per person in urban China increased from 13.6 to 32.7 square meters (National Statistical Bureau 2013).

Chart 10: Urban and rural per person living space, 1985-2010

Sources: Wharton Real Estate Review, NBS, Savills China Research

Nevertheless, housing inequality caused by dual provision of reformed housing and commodity housing (and by house price inflation) increased as well (Yi & Huang 2014). Initially, households which have usually been employed in state sector or powerful work units were privileged (the housing privatization based on the traditional system provided the privileged households a shortcut to become home owners against relatively low costs) and could later cash out on their dwellings by selling them in the second-hand market.

Chart 11: Commodity residential supply, demand and average price 1998-2010

Sources: Wharton Real Estate Review, NBS, Savills China ResearchChart 12: Residential price index by tier 2005-2011

Sources: Wharton Real Estate Review, NBS, Savills China Research

The value to-income rate had already been pushed up to above 10 by state regulations (it was about 15 in 1998). However, it is still extremely hard for young Chinese to afford purchasing a home (flat). What is even worse, buying commodity housing and becoming a home owner is practically the only option if one wants to get a stable and decent accommodation. “Since China has limited affordable housing provision and unregulated private rental market, households have been forced into the unaffordable commodity homeownership market. Nevertheless, a transitional trend is emerging. In the welfare period, the main determinants of dwelling allocation were related to political status such as membership of the CCP, work unit category and cadre rank, as well as other demographic variables such as age, marital status and household size. After the housing reform, more market-oriented factors such as education and total household income began to impact (Yang & Chen 2014).”

What follows, after 2011, the debate about housing policies in China no longer concentrates on economy and real estate industry only, but also on how to secure the equal housing rights of citizens and improve social safety net. More precisely, the central government contemporarily focuses more on subsidized housing provision and commodity housing speculation. In practice, large-scale subsidized housing schemes operated after 2011 and their focus shifts from low-income home ownership to rental housing. Related to this, there are ideas to reform or even totally abolish the traditional hukou system (Yang & Chen 2014).

Referring to numbers, The China’s central government planned to construct 36 million affordable dwellings from 2011 to 2015 (7.2 million each year). Unfortunately, currently there are no clear data about the final effect of that scheme (Yang & Chen 2014). Certainly, however, we know only that around 19.5 million low-cost houses had been built from 2010 to 2013 (Liu & Wang et al. 2013). In effect, the proportion of affordable units in the whole housing stock is more than 20 percent now.

Michał Wołangiewicz, prawnik, ekonomista. Absolwent studiów licencjackich ekonomii oraz studiów magisterskich prawa oraz ekonomii menedżerskiej Uniwersytetu Wrocławskiego. Student studiów LL.M. na specjalizacji Corporate and Commercial Law na the London School of Economics and Political Science (LSE). Alumn Akademii Liderów Rynku Kapitałowego (ALRK) i stypendysta Fundacji im. Lesława A. Pagi. Interesuje się rynkiem kapitałowym, chińską gospodarką, CSR oraz młodą sztuką. Fan piłki nożnej oraz kolarstwa górskiego (MTB), które od wielu lat czynnie uprawia.

fot. pixabay.com

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M. Wołangiewicz: China’s Real Estate Bubble – part 2 Reviewed by on 30 lipca 2017 .

Chapter II CHINA’S HOUSING SYSTEM 2.1. The urban housing sector before the reform between 1949 and 1995 Past policies connected with political intervention have created a situation in which the Chinese housing sector was massively controlled by the government. Between 1949 and 1978 public rental housing was the predominate form of housing provision in urban

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