China 2013 new home sales surge past $1.1tn
Source: Financial Times / Lucy Hornby / 20 January 2014

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-Opinion-

Wealth Privilege in the Chinese Housing Market During 2013

Prospective Chinese homeowners are having an increasingly difficult time securing a house due to the increased demand and other economic factors leading to a real estate frenzy. New home sales reached highs of $1.1tn during 2013, providing various opportunities for the wealthy elite while making it more difficult for younger generations to secure housing. Contributing factors of the prior decade, the current situation and ineffective restrictions on the wealthy elite will lead to a greater understanding of the current and future of the Chinese housing market.

The History of Chinese Home Ownership

The Chinese housing market didn’t always see heightened competition and demand with a small supply available. In fact, it wasn’t until the mid-1990s that Chinese individuals embarked on the homeownership journey. Previously, the State took care of all housing requirements until Li Keqiang put easement efforts in service during the 90s. Land and home buyers inexperienced with real estate and the legal system contributed to the Real Estate Bubble of the 1990s, ultimately leading to heightened inflation and discouraged home buyers. Inflation reached all-time highs, peaking above 25% in 1994, with a steady downfall since.

The Situation Leading Into 2013

After the Real Estate Bubble of the 1990s, the Chinese government and People’s Bank of China began implementing regulations to give the housing market a much needed boost through tightening monetary policies and controlling growth. Over the new decade, the housing market began to recover in China, leading to new purchasing opportunities. However, as policies loosened and more individuals began seeking homeownership, the Chinese real estate market now faces overpriced homes and stiff competition. 2013 saw a 19% rise in housing prices throughout top-tier cities with demand toppling over the supply.

The current situation has not only made it difficult to find a house to purchase, but it has also led to resentment among the younger generation of Chinese. In March 2013, home sales saw a 280% increase in just one week alone, supporting the struggle many younger Chinese are facing. The wealthy elite have the funds to pay the entire house in full, which is a luxury that most young Chinese don’t have, leading to outbidding across the nation. 

Restriction Short-Comings on the Wealthy

In an attempt to mitigate the mounting burden on young Chinese by the wealthy elite, the Chinese government has put housing restrictions in place. A sales tax hike, capital gain tax increase, and second home restrictions are among the list of legislation recently passed to cool the market. Down payments on second homes have been set at a minimum of 60%, while this number is expected to reach upwards of 70% depending on the economic response. Despite the positive effort, these restrictions fall short and remain ineffective for most of the wealthy. The urban elite currently accounts for around 20% of the housing stock according to industry expert Ms Yao, a consultant at Gavekal Dragonomics. Often times these wealthy individuals have the funds to pay for the house outright, completely bypassing any restriction.

Summary

The Real Estate Bubble of the 1990s coupled with new consumer demand to become a homeowner have driven prices to all-time highs, discouraging the younger generation. The housing market is expected to continue growing and presenting opportunities for the wealthy elite, making it an important economic indicator to track over the next few years.