PARPCC#11 – The Chinese real estate crisis

Panda, Rice Alcohol and PCC is a column of Camille Brugier, aimed at introducing scientific articles to a wider audience. His publications can be found on his thread Twitter.

Acquiring real estate does not have the same value in China as in Europe and the United States. Why ?

For citizens first, because in China, for the common man, real estate is often the only way to increase income outside of work in a state which enormously limits household access to financial products. The “stone” is a financial product as much as a roof to put over one’s head. Real estate also represents more than 60% of the assets of a Chinese household, as much as in France (62% of French heritage in 2021 according to INSEE) but much less than in the United States (30% heritage).

Then for the State, because land is the monopoly of the authorities (locales) and a way to replenish budgets: we call it the land financing. This financial windfall has gained in importance over the years 90 with the “liberalization” of the real estate market. The provinces can therefore sell a little or a lot, expensive or cheap, to bring money into the coffers. Like in other parts of the world, but to a largely unparalleled degree, the Chinese authorities are therefore both judge and party when it comes to real estate.

While the State seems to be in control, However, Chinese real estate today seems to have become an uncontrollable monster. During the last two decades, real prices have sometimes increased by 15 at 20% per year. So imagine a house with 300,000 euros which passes to 360,000 the year after! And this, every year… not just during the COVID period…

We know that some cities are more attractive than others, but in China this law of supply and demand is disturbed by a legal consideration: you don't have the right to live wherever you want. It’s not Airbnb that will push you out of your city, but already the authorities who grant you, or not, the right to reside there.

It is the system of hukou : it is assigned based on place of birth. More than an identity card, this system regulates flows in the territory, and prevents in fact rural labor force to work, to live, to use public services, or buy a property… in town. Some provinces, like Zhejiang in July 2023, have said they want to reform this system – but this is not the first time that such announcements have had no effect.

Prices have increased in cities for two reasons: 1) under the effect of population movements in China, and the arrival of new inhabitants in town, who for some will become owners; et 2) Above all, and in particular since 2010, following the policies of local authorities, which limits the sale of land, fueled real estate bubbles.

What to do? For Liu and Ou, no need to further limit “internal migration” since the criteria are already very strict in Shanghai, Beijing and other megacities. For them, rather, it is necessary to create other engines of growth throughout China so that the population is better distributed across all urban areas. The second thing to do (not necessarily easier) : encourage local governments to be more transparent about the sale of plots, by smoothing and adapting the offer so that it becomes more predictable.

Reference: Liu, Chunping et Ou, Zhirong (2022), “Revisiting the determinants of house prices in China’s megacities: Cross‐sectional heterogeneity, interdependencies and spillovers”, The Manchester School, Vol. 90(3), pp. 255-277.

Auteur: Camille Brugnier.