The housing bubble in China has been a serious concern for the last ten years, with the current average house price in big cities such as Beijing and Shanghai reaching more than 25,000 yuan (S$5,100) psm, compared to approximately 5,000 yuan a decade ago.
The Chinese housing market has gone through a quick recovery following the global recession in 2008 – a crisis that caused the market to stagnate for almost six months. In the past ten years, the country had barely suffered from any downturn in the housing market.
The housing bubble lasted for a long time due to market disequilibrium caused by the high demand but limited supply of land. Major factors behind the high demand for housing in urban China include the fast economic growth, rapid urbanisation and idle capital that entered the real estate market. Meanwhile, the restricted land supply is due to the land supply control of the central government and land laws in the country.
Given the housing bubble, the government has implemented policies to curb housing price hikes. It has limited land use for low density buildings and independent house construction, as well as restricted foreign home purchases and housing loans.
Meanwhile, if the government chooses to increase land supply for urban development in order to moderate land pressure, other long term national objectives of the country will be affected, including the protection of arable land for food security. China now faces a dilemma of whether to live with the housing bubble but sustain food security, or loosen the restrictions imposed on land supply and sacrifice food security.
One of the immediate economic effects of the housing bubble is the lack of affordable homes for low-income citizens. Based on official figures, the average housing price in big cities is about eight times the average annual household income. The large gap between low purchasing power of most people and high housing prices has led to a very strange phenomenon, where new housing’s vacancy rate has remained at about 20 percent.
To deal with all the complaints related to the country’s housing bubble, there is a need for the Chinese government to balance food security considerations and implications of the housing market with economic growth imperatives. Moderation of the housing market can be expected through increased land supply, removal of incentives and provision of subsidised housing for low-income citizens. However, it is understood that it could take five to ten years to achieve this goal.