Commercialization of land: A solution to China’s housing boom

The housing boom in China aftermath the 2008 global financial crises is speculated to bring another turmoil in global economy. The housing prices are rising tremendously with an average 1,000 square foot apartment in Shanghai going for $725,00. Although this price isn’t surprising for locals in London or New York but what one should divert attention to is the price-to-income ratio.

The price-to-income ratio is by far the highest in China among the major economies and by huge margin. Chinese are buying property in frenzy , many holding more than one house for the sake of investment.

Why Chinese are investing so much in the housing market?

Firstly, Chinese locals have limited options to invest in order to gain an appreciable return. The deposit rate is roughly around 1.5% and the government has tight regulations on money flowing out of the country. Secondly, many research studies have suggested that the core problem lies in the socio-economic functionality of Chinese society. The infamous one-child policy resulted in a sex ratio of 88 out of 100. Thus, young Chinese bachelors face stiff competition in order to get married considering the low numbers of females. Therefore, in order to gain upper hand over others, Chinese men tend to own at least one house. This eventually resulted in the soaring price of houses with many buying more than one in order to help and finance their children.

How serious is China’s housing problem?

In accordance with the socio-economic factors, China invested massively in infrastructure development to diminish the effects of the 2008 financial crises. It has also resulted in so-called ‘ghost towns’, fully developed towns with all the required infrastructure but no inhabitants because the prices are too high for people to afford. This has indirectly caused a huge corporate debt in China.

The average annual change in housing prices in Shanghai is around 25% over the last 10 years. The graph shows downward trends after every peak. This is the government intervention to prevent the housing market to burst. Mainland Chinese don’t tend to finance the expensive housing by mortgages instead they pay in installments directly with a fixed down payment. The government cools down the market either by raising the taxes on purchase of second house or by increasing the minimum limit of downpayment. However, such actions are further intensifying the effects of this issue as the prices are gaining new heights every 2-3 quarters.

How it can be tackled ?

China being a communist nation , state holds supreme authority over all the land in the country. The purchasing of house in China is actually “renting a house” which implies that the house is granted only for a certain period of 70-75 years. Also unlike in western society, Chinese youngsters don’t live independently away from their parents even after marriage. So , if citizens are allowed to hold total authority over the house or land then the crucial factor of buying house for marriage will be lessened. This also explains why rich Chinese are investing in hot real estate markets all over the world. However , commercialization of land contradicts with the political ideology of Chinese government but no other feasible option has yet been determined.

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