China’s Real Estate Mirage

A view of residential buildings in Beijing’s Tongzhou District in May. Credit Zhang Peng/LightRocket, via Getty Images

When the Chinese government privatized housing in the 1990s, enriching a vast swath of the urban population, it was hailed as a remarkable achievement of the reform economy. Since then, the housing industry has ballooned into a juggernaut that accounts for 70 percent of the country’s household wealth.

More than just a place to live, private housing in the past two decades came to underpin the aspirations of urban Chinese. Homeownership, especially in cities, proved to be a reliable investment outlet. The skyrocketing values of housing have been providing money for sickness and old age in a country where the state has largely dismantled the welfare system. Real estate profits have allowed parents to finance their children’s education abroad.

But the impressive size and wealth of the propertied class belies the growing strains plaguing new home buyers. The country now has some of the least affordable housing markets in the world. The ratio of median home price to median income, a common measure of affordability, in most first-tier cities has soared to higher than that of London.

To cool the markets, local governments have issued myriad purchasing restrictions, like requiring high down payments and banning the purchase of multiple apartments. The proliferation of red tape, together with the increasingly unaffordable real estate, has become a potent symbol of the thwarted economic hopes and the dwindling social mobility that characterize today’s urban China.

In newspapers and dinner table conversations, stories abound of husbands and wives filing fake divorces to get around stringent real estate purchasing restrictions for families. There are also tales of acrimonious disputes between the parents of divorcing couples when both sets claim ownership of the couple’s apartment because they contributed to the purchase. Recently, more than 10,000 home buyers in Beijing found themselves stuck in financial limbo when the government suddenly increased down payment requirements after they had agreements to buy, leaving them short overnight.

In some cases, the housing challenges affect decisions about having children. After the one-child policy was scrapped in 2015, several mothers with single sons confessed to me their reservation about giving birth again: Adding another son would wreck the family’s finances in the future, they explained, because parents are still expected to provide sons with apartments when they reach marriage age to make them eligible bachelors for potential mates.

Nowhere are home buyers’ struggles better reflected than in the saga surrounding “school-district apartments.” Homeownership guarantees owners access to public schools, and the fierce competition among parents for apartments near highly valued schools has long been considered a culprit of the exorbitant housing prices in prosperous metropolises. In certain areas in Beijing, families are now asked to own homes for at least three years before they can qualify for local schools.

The bubbling frustration with the real estate market at times erupts into open defiance. Last week, Shanghai saw a rare public demonstration in its city center when hundreds of home buyers gathered to protest a change in regulations that made their new homes uninhabitable and effectively worthless. The collective anger pushed the government to relent days later, by allowing buyers to move into their apartments, while still forbidding them to sell.

Exasperated by the bureaucratic shackles, a growing number of the wealthy Chinese people are turning their eyes abroad, to homes in suburban America or luxury condos in Australia. According to a survey by the National Association of Realtors, the Chinese rank first among foreign nationals buying property in the United States. Their spending, at $27.3 billion for the year ending March 2016, exceeds the combined total of the next four countries in the ranking.

To address the overheated housing market, city governments should stop relying on stopgap measures that encumber urban residents and just exacerbate the problem over time. Instead, they need to devise long-term structural solutions, such as delinking housing and public services like schooling, or increasing the subsidized-housing supply, to fix market imbalances.

The best solution may also prove to be the most controversial. Implementation of a property tax, many advocates believe, will bring down prices by making speculative purchases more costly. Bringing it to fruition will require governments to overcome vested political and corporate interests, as well as adopting a measured approach to avoid causing a market crash.

Among those people left to confront the housing market, there is a prevailing sense that the rules of economic reform have changed. Many Chinese people believe that “hard work alone leads to success,” Xu Jin, an economics editor at FTChinese, wrote in a recent column. “But they are having a harder time believing the same for their children.”

Rural migrant workers living in cities — who account for more than a third of the population in Beijing and in Shanghai — are by and large excluded from the local housing markets because of their nonnative residential status. It means they have missed out on one of the largest wealth transfers from the state to the people.

That is why when the government declared its decision in April to build a new special economic zone, equal in status to the southern economic hub of Shenzhen, on a piece of rural land roughly 80 miles south of Beijing, local villagers reacted with elation. Suddenly their humble villages seemed to be on the verge of a real estate boom like those they’ve witnessed in neighboring cities.

In less than a day, local average apartment prices tripled. But two days later, Beijing banned housing sales in the region.

Helen Gao is a social policy analyst at a research company and a contributing opinion writer.

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