Users of Sina Weibo, a Chinese online service similar to Twitter, tend to vehemently protest the country’s sharp inequalities between rich and poor. But Weibo users sounded off with unparalleled vitriol in February, when media unearthed the scandal of Gong Ai’ai, a former bank executive who had used false ID cards to accumulate 45 properties, 41 of them in Beijing.
Then several weeks later, a Guangdong province police chief, Zhao Haibin, was exposed for having used a false identity to buy up to 192 houses. “(I) finally realized that in China, properties are forever in the hands of a tiny number of people,” one Weibo user wrote.
While the wealthy and well-connected have snapped up properties as a means of storing their wealth, China’s soaring real estate prices have barred most of the non-rich from buying homes. Despite ambitious government efforts to encourage developers to build low-cost housing in recent years, China’s affordability index, or the ratio of average home prices to average annual incomes, remains shockingly high. According to 2011 IMF figures, for example, a New Yorker earning an average income would have to devote 6.2 years of salary to buying a home; that figure rises to 6.9 years for London, 10 for Tokyo, 15.9 for Shanghai and 22.3 for Beijing.
“On this measure, China looks ridiculously overpriced,” Michael Klibaner, the head of research for Greater China for property consultancy Jones Lang LaSalle, said during a speech organized by the Hopkins-China Forum in Shanghai this month. “But the reality of the market is that houses are not currently being built for people who make average incomes.”
China’s real estate market is extremely young, Klibaner explained. Just 14 years ago, all housing in China was built by the state and distributed by a person’s work unit. In 1998, however, the government liberalized its system by conducting a massive one-time transfer of property, in which it allowed people to purchase the apartments they had been living in for low prices.
Since then, China’s real estate development industry has blossomed, completing about 6 billion square meters of housing, Klibaner said. But while this is a huge figure, more than the housing stock of almost any country in the world, it pales in comparison to China’s massive population and their demand for newer housing. Thanks to the one-time transfer of property, home ownership in China is extremely high – more than 80% by some estimates – but the general quality of housing is quite low.
When you do the math, Klibaner said, “You actually find out that they’ve only completed enough housing for about 27% of the urban population. It shouldn’t surprise you that it’s the wealthiest 27% of the population that have gotten on the housing ladder.”
Investment banks and research organizations have been putting out reports for years touting China’s booming consumer markets powered by an affluent middle class.
But that prospect is still more of a hope than a reality. Consultancy McKinsey & Company estimates that 82% of China’s urban residents are “value” consumers – those living in households with annual disposable incomes between US$6,000 and US$16,000. This gives them just enough to cover basic needs – forget about buying high-priced Shanghai real estate.
These trends are the source of continued apprehension in China over rising house prices. No one, including the government, wants home prices to drop, since that would destroy a vast reserve of urban wealth. With house prices so far above average incomes, however, the Chinese government is worried that further increases could spark social unrest among average Chinese who feel a middle-class lifestyle is hopelessly out of reach. Analysts say the government could pass down further measures to squash speculative investment if housing prices rebound significantly this year.