Introduction: around 40 other industries (Chen andIntroduction: around 40 other industries (Chen and


study is focusing on real-estate sector in China, and especially on property
market. In 2017, property and construction both account for approximately 15% of the whole
economy (share to GDP), with property alone directly impacting around 40 other
industries (Chen and Glenn, 2017) with a tendency for the Chinese government to
heavily rely on infrastructure development to sustain growth in the long term (Letts,
2017). When ancillary industries are taken into account, the real estate impact
on Chinese GDP is estimated to be around 35% (Anderlini, 2015 / Cao, 2014).

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Besides, the medium to
long-term loans and mortgages to households have been growing by 13 to 15%
yearly since 2013 (Chinese household debt-to-GDP rose at 47% in the second
quarter of this year) made possible by the shadow banking sector and the sales
of lands by local governments, factors that are artificially driving the GDP by
debt (Tham and Chatterjee, 2017).

1) Situation of the housing market:

a) Selling:


It is not
possible to own land in China but possible to lease it to the government during
a maximum of 70 years for residential use. Despite this assumption, China’s
housing market is growing rapidly. Data from
thirty-five major Chinese cities illustrates that average real housing prices
grew at an annual rate of 17% from 2004–2013, higher than the 11% growth
in average income across those cities and the nation’s 10% growth in gross
domestic product (GDP) during the same period (Fang, Gu, Xiong, and Zhou 2015).

Such a growth of China’s real estate market may be considered
abnormally fast compared to other countries with an approximate 120% increase since
2010 (Dent, 2016). If we look at the data in 1st tier cities, like
Shanghai, Beijing, Guangzhou and Shenzhen, we can see that the increase of
housing market price is especially prevalent in those areas. In October 2016 Shanghai
had a year-to-year growth of 27.82%, Beijing 23.5%, Guangzhou 15.9%, and
finally Shenzhen had an astonishing growth of 65% during the year 2016. (Colliers
International, 2017).

Actually, between 2005 and 2016, price-growth in main Chinese cities
has been 923% for Shenzhen, 404% for Shanghai, 363% for Beijing, 216% for
Tianjing, 204% for Wuhan, 201% for Nanjing, 183% for Hangzhou, 175% for
Chongqing, 130% for Chengdu and 101% for Guangzhou. Similar patterns are found
for luxury housing market and second-hand house markets (Savills, 2017).  

b) Renting:


Rental yields (gross annual rental income expressed as a percentage of
today’s property purchase price and representing the return on investment by
renting) on almost all sizes of apartments in 13 cities are below 2% nowadays compared
to 10% and 8% in Beijing and Shanghai respectively in 2005. Usually, leasing
property involve paying Individual Income Tax (IIT), Business Tax (BT), and
Real Estate Tax (RET). Besides, other taxes may also be imposed on rental
income by local governments.

Consequently, rental yields are usually considered ‘safe’ at levels
above 5% which is obviously not the case anymore since 2009-2010. It is hard to
escape the fact that prices are climbing steeply, while rents are not moving
much because of recent governmental policies pushing up the number of
properties available for rent. Xiamen, for example, is today considered as the
city with the most risks of a bubble with 100 years return on investment
through rent while it requires 72 year in Beijing (Yangpeng, 2017).

 Construction and


Between 2003 and 2014, construction sector added 100 billion
square feet of floor space, or 74 square feet for every person in China
(National Bureau of Statistics of China 2014; Chivakul et al. 2015). During
this time, China built an average of 5.5 million apartments per year. In 2014, an
estimate of 40 million people worked in China’s construction industry, or 16%
of the country’s 250 million migrant workers. By comparison, construction
industry accounted for 8% of total employment in the United States and 13% of
that in Spain at the peak of their most recent housing booms (the Global
economy indicators).

Besides, The Hukou system enables government to collect
residents’ information, such as name, parents, date of birth… Furthermore,
this system serves as a tool for population distribution and rural-to-urban
migration regulation. It involves that a resident of a 1st tier city
(and his family) who doesn’t hold a Hukou for this city can’t get public
services or any benefits in terms of property access, despite of living and
working in the city. In practice, the government may use this tool to evict
families and relocate them in other cities/areas if they need to control
population’s distribution for example (Shepard, 2016).




survey conducted by the China family financial survey and Research Center in
June 10, 2014 and another in May 2015 “National urban housing market survey
report”, evaluates the vacancy rate in major cities between 22% and 26%
and it seems to keep being on the rise. Besides this phenomenon, we can count
between 20 and 50 “ghost cities “with vacancies rates between 50% and up to 90%
(Chi and Al, 2015 / Cai, 2017.). Even if precise and official numbers are
difficult to find, it is estimated that China has an overall 25 to 30% vacancy
rate in the real estate sector today.  In
comparison, foreign housing markets usually totalize a maximum of 10% (Japan)
overall. In 2008, for every one

sq. m. sold, 3,9 sq.m. were built. In 2012, this ratio increased
to 1:4,4.


This “boom” in the Chinese real estate market, involving a
rise of the construction rate, surges from early 2000 with a net speed-up after
2004. It can be explained by a combination of several factors. At first, low
interest rates on loans and mortgages introduced as a policy to support a rapid
economic development, has allowed individuals to access property easily (also
related to cultural considerations as buying a house prior wedding).

On the other hand, the need for
local governments to finance themselves (As a major part of local taxes was
handed over to central government) by selling lands to promoters (70 years old
bails). Those two factors have created a surge in the construction rate which
also led to a quick rise of housing prices leading to speculation. Individuals
began to see in the housing market a better way to invest their savings compared
to lower interest rates offered by the banks, and a lack of regulations by the
central government has amplified this phenomenon.

2) Financing:

a)  Loans and


Even if China’s GDP has slowed down in the past few years,
bank-issued home loans rose faster with a household debt-to-GDP up to 47% in
the second quarter of 2017 compared to 39% at the same period 2 years ago
(China’s corporate debt represent 169% of the GDP) according to the Chinese
central bank. Besides, the household
consumption accounts for only 37% of GDP, which is low compared to the United
States where the household consumption is about 70% of GDP (Tham and Chaterjee,


Moreover, between 2011 and 2014, local governments’
debt was up by 120%. That increase happened even after Beijing forbid local
officials from raising excessive amounts of money. This is due to the fact that
local governments rely on sales of land for 35% of their revenues, according to
research from Deutsche Bank, and virtually all of their outstanding debt is
collateralized by government-owned lands which are often seriously overvalued.

b)  Shadow banking:


Legally, to
get a mortgage in China, individual investors have to put down 20 to 40%, of
the total amount and even more in some big cities. But recently, individuals have
been able to borrow huge amounts of money for down payment through a large and
unregulated shadow banking network, making it possible for someone with no
savings at all to take out a mortgage. Property developers, real estate
agencies, and internet peer-to-peer lenders are active in this highly leveraged
market, and they sell the loans as wealth-management products, to millions of
individual investors in China.


corporations and local government also takes advantages of the shadow banking
sector. Indeed, to avoid a ban on running deficits, local governments have
borrowed money on their behalf from state banks, bond markets and lightly
regulated underground institutions. This process is technically illegal but has
been tolerated because it allowed growth after the global financial crisis.


As real
estate sales have slowed down, local officials have started using these
financing tools to purchase lands from themselves using credit from both
state-owned and shadow banks and are now seen as an unsustainable attempt to
boost short-term growth (Huang, 2016).

c)    Income level comparison:


The data for mortgage borrowers from 120 Chinese cities, Fang, Gu,
Xiong, and Zhou (2015) showed that the price-to-income ratio for middle-income
households in first- and second-tier cities reached about 8 in 2011, a level
much higher than that during the peak of the U.S. housing bubble (about 3) and
similar to that during the peak of the Japanese housing bubble in 1989.
As of 2016, a 90-square-meter apartment in Beijing or Shanghai
fetches more than 25 times average household income.

3) Government intervention:

began to act actively on the issue after international press started to show
interest into ghost cities as Ordos (Kanbashi, Inner Mongolia) or Dantu
(Zhenjiang, Jiangsu) in 2010. They then faced a double consideration as a too
important and fast regulation could have slow down the whole economy, even made
the all housing market collapse (often quoted as “real estate bubble”). They
mainly tried to cool it down by controlling interest rates at first which has
had temporary and limited results (alternatively stepping
in in order to limit price increases then stepping out in order to stop it from
falling too much). In 2010 the government began to
implement strict regulations as no more than 2 properties by couples which led
to an increase in divorces rates (people finding alternatives to buy more
properties) and major cities were required to publish housing
market price to keep it under control.


recently, an increase in mortgages interest rates has been set-up (leading to
shadow banking and loans frauds: Short-term household loans up by 243% (1.6
trillion RMB) in the first 10 months of 2017 (Wong and Zhang, 2017) mainly used
as down payment for mortgages on properties). In April 2017 a regulation
quoting that newly bought houses must be held more than 4 years before being
resold has been enforced in an attempt to avoid a panic phenomenon which could
lead new (and indebted) buyers to quickly resell their properties if the
housing market was slowing down or even if prices was falling (avoid a domino
effect). Moreover, the government announced that it intends to purchase unsold
properties, and turn them into low-cost housing, measure that might lead to a
fall of the market price (Shepard, 2016).








Finally, more than a decade of frenetic building has led to a massive
overcapacity and created significant amount of empty apartment blocks in most
Chinese cities. Surprisingly, this oversupply hasn’t contained the prices to
keep rising in main cities, leading to speculation, bank frauds, shadow banking
and making property difficult to access for an important part of the
population.  The high vacancy rates in
properties gives indications about the potential risks associated with a huge
and nowadays still growing “real estate bubble”.


However, since the unemployment rate is low (less than 3%) compared to
high foreign reserves as well as a consistent GDP growth (up to 6,5%), a global
collapse is unlikely to happen in a short term range. But China’s overall debt
to GDP has jumped from 150 percent at the end of 2006 to more than 250 percent in
2016 (Kottasova, 2016), the kind of surge that in other countries has resulted
in a financial bust or sharp economic slowdown. As it appears that GDP is
artificially driven by the real estate sector and associated loans, a
noticeable slowdown leading to falling market prices could result into cascading
selling and a surge of bad-debts proportion, involving important complications for
the whole country’s economy.