The Dangers of China’s Recent Housing Price Spike

by Sandy Zhu

China’s housing price just experienced its biggest increase in 14 months: In November 2009, the National Bureau of Statistics (NBS) reported that property prices in 70 Chinese mainland cities rose by an average of 3.9 percent when compared to their price last October. Prices of commercial residences climbed 4.4 percent and high-end housing went up by 1.5 percent.  I think this phenomenon is very interesting—granted, China’s economy wasn’t hit as hard as its American counterpart, but none of its other sectors has  recovered this fast.  What then, are the driving forces behind the recovery of China’s housing market?

I think one thing we have to realize about the housing price situation in China is that housing is a luxury good there. The Chinese populace living in underdeveloped rural areas is not the one that’s out and buying houses. They usually live in family-style houses built by and inherited from older generations. This part of the population still relies heavily on farming, which does not bring enough income for them to “indulge” in property investment.  According to statistics, 16 percent of the houses purchased serve investment and speculation purposes, just below the international alarm rate of 20 per cent. What this signifies to me is the fact that only certain people are buying houses in China, and they are still buying more of it even in today’s economy.

The mixed-use Jianwai Soho development in Beijing (Courtesy Flickr Creative Commons)

One might wonder how this certain group of people has recovered so fast from the failing economy. Let’s try to decode that by looking at the geographical regions with the largest increase in housing market. We see the sharpest increase in Shanghai, Beijing, and a few other big cities in China. More people are buying houses in these regions, and even more are buying luxurious property (think spacious townhouses in a country where the average person can only afford a room). The large cities mentioned above have the highest concentration of wealthy consumers. Most of them are buying houses now as a form of investment to avoid the risks that are present in the traditional market. Therefore, the increase in housing price in China really doesn’t reflect a revival of housing market: the poor still can’t afford to buy houses and the rich are just indulging as usual.

To me, this gives light to the dangerous widening of income gap in China. As the housing price is being pushed up by the rather unaffected upper-middle class, the lower class, blue collar workers are the ones that are hurt the most. As the Chinese export bubble burst, these workers lost their jobs quickly and have no other means of supporting themselves due to low level of training and education.  For them, houses are more expensive while their checkbooks are thinner.  Instead of buying houses when they get married or expand their families, they will have to resort to renting. I’m really curious to see what will happen next in the renting market in China—regardless, I think that housing markets in China in general are still in a precarious state.

Sandy Zhu ’12 is an Economics & Mathematics major in Jonathan Edwards College.