Battling the Bubble: up- and- coming cities risk an established real estate issue

“Houses are for living in,” President Xi Jinping remarked during the 19th CPC Congress in 2017. His seemingly self-explanatory comment was aimed at one of the greatest challenges China faces in the upcoming decade: its real estate market.

Ensuring the bubble doesn't burst, like the one that crashed the US economy in 2008, is a government priority. Numerous overlapping policies and reforms aim to curb rising house prices, but prices in Beijing alone rocketed by an alarming annual average of 19.8 percent between 2006 and 2016.

The bubble has thus far seemed containable, and mostly localized to China's four “first-tier cities,” where economic and cultural resources give rise to a limitless demand for housing. A jargon for property developers more than policymakers, the “tier” system has no official definition in China, though the media commonly refers to Beijing, Shanghai, Guangzhou, and Shenzhen as definitively “firsttier.” The key benchmarks include population, GDP, regional influence, general renown, its administrative level (provincial, prefectural, or sub-prefectural), and whether the city contains key industries or educational entities.

Astronomic housing valuations have also begun to spread to lowertier cities now offering hukou, or household registration, to lure recent graduates. Their influx drives up demand for urban housing, suggesting the beginnings of a speculative bubble, as businesssavvy Chinese snap up property in the expectation of handsome returns within a few years.

In 2017, prices in Xi'an, the capital of Shaanxi province, surged from 6,478 RMB to 11,184 RMB per square meter, despite four attempts by the local government to implement price controls. Meanwhile, Xi'an talent policies saw the population grow by 210,000 to 300,000 between January and April.

Chengdu, Sichuan's capital, saw house prices rise over 30 percent between July and December 2017, according to Fang.com, after the city's hukou reforms allowed 120,000 individuals with bachelor's degrees to apply without conditions attached.

The link between hukou and house prices is not new, nor necessarily negative. Following the 2008 global financial crisis, cities such as Chengdu and Tianjin, implemented a house-for- hukou policy to bolster their struggling real estate markets. Additionally, handing out hukou could help local governments safeguard against “ghost cities”— overdeveloped suburbs with few residents—at least until China meets its ongoing urbanization targets.

And it would be unfair to entirely blame rising prices on recent graduates. According to a recent Caixin report, a 2015 State Council policy ordering financial compensation (instead of new homes) to be given to residents affected by a national slum-clearing effort has resulted in a huge cash injection into the housing market, with a comparative increase in housing stock. The result has been a surge in prices particularly in third and fourth-tier cities, causing the China Development Bank (CDB) to cease funding shantytown redevelopment projects across China. Many of the loans had gone to “repackaged” projects seeking loopholes in lending, and some fear that without the borrowed cash to fund compensation, property markets might collapse.

Meanwhile, as education becomes a prerequisite for urban hukou, marginalized populations may find it harder than ever to participate in urban life, and prices could make home-ownership difficult even for educated youngsters—potentially pushing a whole generation out of the market, only decades after the concept of home ownership was reintroduced. - THE EDITORS