Written by Hanzhang Qin
According to Bloomberg News, which analyzed Citibank’s research on China’s real estate sector, a large number of buyers are refusing to pay their home mortgages because of the unfinished buildings and depressed prices in the housing market (Bloomberg News, 2022). Delayed delivery of houses and poor credit resulted in a shortage of funds for real estate companies. As expected, the buyers lost confidence in their ongoing projects. The growth rate of national real estate development investment then decreased monthly from 10.9% in August 2021 to -7.4% in August 2022 (NBS, 2022). The following content summarizes the potential factors that may have led to this decline in the housing price market.
I. The Pandemic’s Role in Decreased Demand in the Housing Market
The COVID-19 Pandemic negatively influenced population consumption patterns. Both investment-based consumption and saving-based consumption behaviors have changed since the initial lockdowns. According to the People’s Bank of China’s financial statistics report released on July 11, 2022, for the first half of the year, RMB deposits increased by 18.82 trillion yuan in the first half of the year, resulting in an increase of 4.77 trillion yuan year-on-year; Deposits from the household sector increased by 10.33 trillion yuan, compared to 7.45 trillion yuan in the same period last year, resulting in an increase of 38.7% (CNTV, 2022). Potential reasons for this include an increase in people’s willingness to save preventively and a decline in investor confidence due to the downturn in global capital markets. Individuals’ willingness to save increases, so they spend less on investments, like purchasing houses.
On the other hand, The National Bureau of Statistics survey of urban unemployment rates in the country’s 31 major cities shows a steady rise from five percent to six percent from the end of 2019 (the beginning of the COVID-19 outbreak) to May 2022 (NBS, 2022). Within the period, the sectors most affected by the outbreak include the restaurant industry, tourism, and the hospitality industry. The rise in unemployment has left many people without a stable source of income and thus unable to afford high down payments on housing.
Housing demand is also limited by the negative impact of the epidemic on the accommodation sector (B&Bs, hotels, house rentals, etc.). The total profit statistics of star-rated hotels and five-star hotels in China by Meadin Research Institute show that star-rated hotels lost 11.569 and 11.844 billion yuan in 2020 and 2021, respectively, with unprecedented losses (Gao, 2022). Therefore, it is likely that losses in the hotel industry will lead to the withdrawal of many poorly run enterprises from the market and reduce the demand for properties.
II. Excess Supply of Housing
According to the data provided by the central bank, China’s urban household home-ownership rate reached 96%. From this percentage, 31.0% of households have two suites, and 10.5% of households have three suites or more; The average household has 1.5 sets of houses (SSD, 2022). This suggests that in the prominent metropolises, many properties are not used to meet residential needs but to keep vacant for investment value. False demand led to bubble-like high prices in the housing market in previous years, and now when investors give up on these properties, the excess supply and inflated selling prices make it unaffordable for residents with genuine housing needs. After more than 20 years of the rising domestic property market, the rigid demand of residents in various cities has begun to saturate. In other words, people who can buy a house already own several sets of properties, and people who cannot afford to buy a house are still unable to purchase property due to the increasingly high prices in the market.
From the perspective of real estate developers, we can see this issue more clearly. China’s third largest real estate company, Evergrande Group, has been threatened by their buyers who are refusing to pay their mortgages due to the excessive number of uncompleted projects that have been sold. According to statistics released by the China Indices Academy at the end of 2021, Evergrand Group currently has 1322 unfinished projects covering a total area of 300,000 square meters (CIA, 2022). As real estate investors shift their investment centers to popular sectors such as medical and new energy, real estate developers are unable to obtain sufficient funds to complete their projects, which has led to a decline in real estate security market prices. The “pseudo-supply” of unfinished projects has resulted in a smaller actual supply than the booked supply, which led to inflated prices and a credit crisis for developers.
III. House Price Imbalance Caused by School District Policies
Prior to January 1, 2019, the Education Bureau of Haidian District in Beijing, the city with the highest concentration of outstanding junior and senior high schools in China, had a rule of admission for citizens. When students apply for admission into elementary and junior high schools, they are assigned to a “school district” according to their place of residence. For example, residents living near a renowned middle school would have the right to apply directly for admission. Such a policy has led to a spike in housing prices near the more prestigious high schools and an oversupply of real estate in the suburbs. Naturally, realizing the seriousness of the problem, the government issued new regulations at the end of 2019. Residents who have been issued a real estate certificate for their home in Haidian District will continue to be enrolled in multiple schools through computerized assignment, meaning that direct admission to a particular middle school or elementary school will not be guaranteed.
Although the new policy established a dampening effect on housing prices near prestigious middle schools, the computer-assigned area is still the number one reference for residents choosing a housing. A map of home prices in the Haidian District summarized by Gotohui (a data searching engine) shows that homes within the computer-assigned area of prestigious middle schools are nearly 40% more expensive than homes outside the area.
In addition, due to the imperfect boarding mechanism in middle and high schools and the limited total number of on-campus housing, all boarding high schools require that only students who live more than 18 kilometers (requirements vary by school) in a straight line from the school can apply for housing. This resulted in continued high demand for housing near prestigious high schools, with housing prices declining gradually with distance centered on the high school.
In order to balance the housing market, the government should support the boarding system for elementary and high schools so that the schools can better meet the housing needs of students. Schools can evenly distribute educational resources by expanding across districts and transferring teachers and materials from prestigious schools to surrounding areas.
In general, the reduction in housing demand due to the epidemic, the “false supply” of unfulfilled contracts, and the imbalance in the housing market due to School District Policies have all contributed to the downturn in the Chinese real estate market. A new government program to help manage the deteriorating real estate business is imminent and necessary.
Works Cited
Bloomberg News. (2022, July 13). China Real Estate Market: Homebuyers across 22 cities refuse to pay mortgages. Bloomberg.com. Retrieved October 16, 2022, from https://www.bloomberg.com/news/articles/2022-07-13/chinese-homebuyers-across-22-cities-refuse-to-pay-mortgages?leadSource=uverify+wall
China Indices Academy. (2022, January 8). Evergrande Property Group 2021 Interim Results Announcement. 双轮驱动，笃定前行–恒大物业集团2021年中期业绩发布. Retrieved October 16, 2022, from https://report.cih-index.com/detail/40752.html
China Network Television. (2022, July 11). 央行：上半年人民币存款增加18.82万亿元. Central Bank: RMB deposits increased by 18.82 trillion yuan in the first half of the year. Retrieved October 16, 2022, from https://news.cctv.com/2022/07/11/ARTIKfJFrmRMqAwi6kVmIHLg220711.shtml
Gao, M. (2022, July 20). 2021-2022年中国旅游住宿品牌发展环境分析. 2021-2022 China Tourism Accommodation Brand Development Environment Analysis. Retrieved October 16, 2022, from https://www.meadin.com/report/244568.html
Gotohui. (2022, September). Chart of Beijing Haidian District House Price Monthly Trend. 北京海淀区房价查询_历年房价数据_聚汇数据. Retrieved October 16, 2022, from https://fangjia.gotohui.com/fjdata-613
National Bureau of Statistics. (n.d.). 2022年1-8月份全国房地产开发投资下降7.4%. National real estate development investment down 7.4% in January-August 2022. Retrieved October 16, 2022, from http://www.stats.gov.cn/tjsj/zxfb/202209/t20220916_1888305.html
Survey and Statistics Department, People’s Bank of China. (2022, September 1). 2019年中国城镇居民家庭资产负债情况调查报告. China Finance, 9, 100–101.