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

The World of Chinese - - Cover Story -

“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, 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

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