Housing Reform and Housing Affordability in China: A Case Study of Shanghai

1. Housing Reform and Housing Affordability in China: A Case Study of Shanghai Jie Chen PhD (Uppsala), Associate Professor School of Management, Fudan University & Institution for Housing and Urban Research, Uppsala University, Sweden

2. The Contents • Housing reform in China 1978-2006: the transition path • Housing market development in Shanghai 1993-2006 • Assessing the housing affordability situation in Shanghai 1995-2006 China Urban Land and Housing in the 21st Century, HK Dec.2007

3. Contributions • Background materials • A systemic analysis of housing affordability in urban China • Methodology contribution: New approaches of measuring housing affordability: • dynamic price-to-income ratio; • dynamic residual income approach China Urban Land and Housing in the 21st Century, HK Dec.2007

4. The rise of the question • The issue of housing affordability in China must be understood in the historical background • Before the 1978 reform, residential housing was a welfare good that distributed by the authority, no problem of affording, but just chance to be allocated and time of waiting • Only after the housing becomes a commodity good, the housing affordability issue arises. • The transformation of housing finance system has played a critical role in this process. China Urban Land and Housing in the 21st Century, HK Dec.2007

5. The welfare housing allocation and old housing finance system • Under the welfare housing system, government produced and allocated housings. • Virtually all housing investments were solely financed by the state budgetary funding. • The single-channel state budgetary funding housing finance system could not be sustained. • Due to the continued financial deficit, investment on urban residential housing was consistently low. • Housing storage was extremely serious in big cities like Shanghai. China Urban Land and Housing in the 21st Century, HK Dec.2007

6. Housing Reform in China Three phases of China housing reform after 1978: • 1) 1980-1988, rent increase; • 2) 1989-1998, the selling of public housing (at discounted rate), the design of housing subsidies, infant developments of new housing finance system including the housing provident fund; • 3) 1998-now, the complete demolition of welfare housing system and the formation of a free-wheeling, market-driven housing sector. China Urban Land and Housing in the 21st Century, HK Dec.2007

7. The Restructuring of Housing Finance System in China (1) • Housing Provident Fund (HPF): participating employees contribute a certain proportion of their salaries to their HPF accounts and employers contribute an equal amount. The compulsory minimum contribution rate in Shanghai is 7%. The savings at HPF can only for housing-related purposes. • The functions of HPF: HPF initially was designed to finance housing production now it mainly issues personal home mortgage at a preferential interest rate . • Problems with HPF: there may be an economic redistribution from the low- to high-income households. China Urban Land and Housing in the 21st Century, HK Dec.2007

8. The Restructuring of Housing Finance System in China (2) • The Home Mortgage Market in China:the total outstanding value of home mortgage had a 43-folds growth between 1996 and 2005. The share of home mortgage in the total financial loans increased from 0.49% in 1998 to 8.9% at the end of 2005. • The Home Mortgage Market in Shanghai: the importance of home mortgage is higher in Shanghai than any other cities in China: in 2005, the newly-added home mortgage loans accounted for 45.6% of all newly-added long-term RMB loans and the outstanding value of home mortgage loans accounted for 15.8% of total financial loans. China Urban Land and Housing in the 21st Century, HK Dec.2007

9. An overview of Shanghai residential housing industry • Before the 1978 reform, investment on residential housing was little. The consequence: the living space floor per capita in 1952 was 3.4 sqm; in 1978, 4.5 sqm, • Between 1978-1998, housing development was much lagged behind the economic growth. • The 1998 reform lifted the welfare housing system. But the market slumped into stagnancy between 1999 and 1999. The Shanghai government had tried hard to stimulate the home demand. • Since 2001, the housing market begins soaring. The house prices in Shanghai kept rising with continuously double-digit rises between 2002 and May of 2005. • The market has been cooled down since May of 2005. • However, strong rebound since this summer China Urban Land and Housing in the 21st Century, HK Dec.2007

10. This year (2007.1.1 - 2007.11.8) • Sale: • 133,010 units of first-hand residential property (implying13,058,400 square meters) have been sold • Available on the market: • First-hand: 26,878 units (2.44 million sqm) • Second-hand: 72,062 units (8.59 million sqm) China Urban Land and Housing in the 21st Century, HK Dec.2007

11. Housing Investment and Housing Conditions in Shanghai 1952-2006 China Urban Land and Housing in the 21st Century, HK Dec.2007

12. The General Trend in the Shanghai Real Estate Market China Urban Land and Housing in the 21st Century, HK Dec.2007

13. The market of first-hand commodity residential housings in Shanghai, 1995-2006 China Urban Land and Housing in the 21st Century, HK Dec.2007

14. The sale structure of commodity housing 1992-1996 China Urban Land and Housing in the 21st Century, HK Dec.2007

15. Commodity and total housing investment 1995-2006 China Urban Land and Housing in the 21st Century, HK Dec.2007

16. Housing supply in Shanghai 1995-2006 China Urban Land and Housing in the 21st Century, HK Dec.2007

17. Why Shanghai housing price rises so fast? As a consumption commodity • The market is new:new is more expensive than old; 1998-2005, the total new supply is 17.484 million sqm, roughly 1.6 million new apartments, implying 0.2 million new apartments every year, 4% of total (5 million local) households; rich people got them first. • Solid increase in income;real growth of per capita disposable income, 147% between 1993-2005; 70% between 1997-2005; optimistic expectation of future income growth. • Strong demand for housing improvement: the depressed demand for housing of old generation before the 1998 reform and the compensated demand released when marketization. China Urban Land and Housing in the 21st Century, HK Dec.2007

18. Note: Disposable income per capita in Shanghai 2004-2005, by income category Year 2004: bottom 20%, 7065; 20%-40%, 10664; 40%-60%, 14149; 60%-80%, 19371; Top 20%, 34404; Year 2005: bottom 20%, 7851; 20%-40%, 11800; 40%-60%, 15668; 60%-80%, 21313; Top 20%, 37722. China Urban Land and Housing in the 21st Century, HK Dec.2007

19. Why housing price rises so fast? As a consumption commodity (conti.) • Urban redevelopment: on average 80000 households per year were forced to move away but compensated by mobility fund (cf.Table 2) • Urbanization and migration • Culture factors: a home of own is a symbol of social status; family supports the only one child with all resources;…… • Institutional factors: social security and welfare • Quality improvement: the need to decompose the rise due to quality improvement and the rise due to demand increase---hedonic method (Chen, 2005) China Urban Land and Housing in the 21st Century, HK Dec.2007

20. Completed Demolition and Resettlement Status in Shanghai(2000~2004) China Urban Land and Housing in the 21st Century, HK Dec.2007

21. Why housing price rises so fast?----As an investment commodity • Lacking investment channels for the new riches • The lack of investment channel and the bearish stock market • The development of home mortgage market • Excess Liquidity? • Record-low interest rate, 6% for long-term loan; although eight-times interest rate adjustment in 2007 China Urban Land and Housing in the 21st Century, HK Dec.2007

22. Figure 7: the Shanghai Stock Index 1993-2006 2500 2000 1500 1000 500 0 2004/07/30 2005/01/31 2005/07/29 2006/01/25 2004/01/30 1997/01/31 1997/07/31 1998/01/23 1998/07/31 1999/01/29 1999/07/30 2000/01/28 2000/07/31 2001/01/19 2001/07/31 2002/01/31 2002/07/31 1993/01/29 1993/07/30 1994/01/31 1994/07/29 1995/01/27 1995/07/31 1996/01/31 1996/07/31 2003/01/29 2003/07/31 The bearish stock market China Urban Land and Housing in the 21st Century, HK Dec.2007

23. The Role of Home Mortgage • Before 1999, nearly no home mortgage loans can be applied in China; the only way to finance the home purchase was cash and savings. • Now home mortgage loan is widely regarded as the best-quality asset by all commercial banks • In 2005, in Shanghai, the newly-added home mortgage loans accounted for 45.6% of all newly-added long-term RMB loans; and the outstanding value of home mortgage loans accounted for 15.8% of total financial loans, in contrast to only 1.34% in 1999. • In the third quarterly of 2007, the share of housing mortgage in total new banking loans was 75% in Shanghai! China Urban Land and Housing in the 21st Century, HK Dec.2007

24. The Growth of Home Mortgage Market in Shanghai 1999-2006 China Urban Land and Housing in the 21st Century, HK Dec.2007

25. Figure 8：The savings and housing mortgage in Shanghai Unit：100 million 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2001 2002 2003 2004 2005 Total savings Consumption loan housing mortgage Housing finance in Shanghai China Urban Land and Housing in the 21st Century, HK Dec.2007

26. Home mortgage market in Shanghai, 1995-2006 China Urban Land and Housing in the 21st Century, HK Dec.2007

27. Why property price rises so fast?----As an investment commodity (continued) • Very strong demand from outside of Shanghai • nouveau riche from all other parts of China • overseas hot-money investors rushing in • speculation on RMB appreciation • ……. China Urban Land and Housing in the 21st Century, HK Dec.2007

28. Pre-sale Registration of Commodity Buildings in Shanghai(1997~2003) Notes：The ratio of Outside Shanghai and Overseas in 2001 and 2002 excludes the number of pre-sale registration of overseas sales commodity buildings. China Urban Land and Housing in the 21st Century, HK Dec.2007

29. Completed Residential Buildings for Overseas Sales in Shanghai by the end of 1999 Source：Shanghai Real Estate Market，1999，Table 34，P68 Notes：1US dollar＝8.278 RMB, 1999 China Urban Land and Housing in the 21st Century, HK Dec.2007

30. Inelastic supply • Land us regulations in mega cities like Shanghai become increasing strict • Revenues from land auctions are important in the fiscal incomes of local governments. • Property developers intentionally slow down the speed of building and selling to bolster the prices China Urban Land and Housing in the 21st Century, HK Dec.2007

31. Inelastic response of housing supply China Urban Land and Housing in the 21st Century, HK Dec.2007

32. Assessing Housing Affordability in Shanghai China Urban Land and Housing in the 21st Century, HK Dec.2007

33. The concept and methodology of housing affordability • The meaning of “housing affordability” still remains virtually unclear • The popular price-to-income ratio or its alternative forms: logical weakness • The residual income approach: cares whether the income after housing expenditures falls below the level of shelter poverty or housing-induced poverty. China Urban Land and Housing in the 21st Century, HK Dec.2007

34. Applying the static price-to-income ratio • Shanghai households’ income and expenditure structure (cf. Table 5): high-income is 5 times of low-income • The Ratio of House Price to Income (in 2004): • Take the average sale price 6,385 RMB/sqm and floor size of 90 sqm, a typical housing costs 574,650 RMB • Times of Low-income total family disposable income: lowest 20%, 25; lowest 20-40%: 18; 40-60% income: 13; 60-80% income: 10; highest 20%: 6; Average: 11. • Large disparity in home buying capability • Nearly 60% no chance to borrow a mortgage • Worsening trend in the home affordability for the mass populace since 1999, but not for top rich China Urban Land and Housing in the 21st Century, HK Dec.2007

35. The static price-to-income ratio indicator in Shanghai, 1995-2006, by income category China Urban Land and Housing in the 21st Century, HK Dec.2007

36. M/I, Monthly mortgage payment of a standard housing as share of monthly disposable income, 1995-2006, by income category Note: mortgage terms: 25-year maturity period, 20% downpayment, and the interest rate is kept constant at the level of the borrowing year. China Urban Land and Housing in the 21st Century, HK Dec.2007

37. Housing affordability and supply mismatch • Very few small-sized new residential housings in the Shanghai housing market. • In 2003, for the whole city, less than 8% new dwellings sold were with the construction floor space less than 90 sqm. • New housings are larger than most EU countries China Urban Land and Housing in the 21st Century, HK Dec.2007

38. Sizes of Housings in EU China Urban Land and Housing in the 21st Century, HK Dec.2007

39. The dynamic price-to-income ratio • Between 1995 and 2005, the mean housing price in Shanghai increased 270%. • But the real disposable income per capita during same period increased 214%, roughly matchable. • However, the income disparity between different groups is widening. • Recalculate the price-to-income ratio by simulating households bought homes at earlier years and their incomes keep growing. • The housing costs are fixed but income grows. The affordability will improve as the economy improves. China Urban Land and Housing in the 21st Century, HK Dec.2007

40. Note: Disposable income per capita in Shanghai 2004-2005, by income category Year 2004: bottom 20%, 7065; 20%-40%, 10664; 40%-60%, 14149; 60%-80%, 19371; Top 20%, 34404; Year 2005: bottom 20%, 7851; 20%-40%, 11800; 40%-60%, 15668; 60%-80%, 21313; Top 20%, 37722. China Urban Land and Housing in the 21st Century, HK Dec.2007

41. The price-to-income ratios dynamically simulated for households bought home in 1995 China Urban Land and Housing in the 21st Century, HK Dec.2007

42. (M/I) Monthly mortgage payment as share of monthly disposable income, dynamically simulated for households bought homes in 1999 Note: The mortgage is assumed for 80% value of a mean-priced home, 25-year maturity period and the interest rate is kept constant at 5.58%, the level in 1999. China Urban Land and Housing in the 21st Century, HK Dec.2007

43. China Urban Land and Housing in the 21st Century, HK Dec.2007

44. The residual-income approach • Measuring whether the money remained after deducting the standard housing expenditures is sufficient to satisfy basic living needs • When the after-housing residual income could not satisfy basic needs, this is defined as housing-induced poverty. • The housing-induced poverty line is defined from the non-shelter consumption expenditure of the bottom 20% income group in each year. China Urban Land and Housing in the 21st Century, HK Dec.2007

45. China Urban Land and Housing in the 21st Century, HK Dec.2007

46. Housing expenditures as share of consumption expenditures (%) in Shanghai, 2000-2005 Note: share1 = maintenance /consumption expenditures; share2 = Living/consumption expenditures. China Urban Land and Housing in the 21st Century, HK Dec.2007

47. Housing-induced poverty line • Name MNSB (monthly minimum acceptable non-shelter consumption budget) as the housing-induced poverty line. • MNSB is defined from the monthly non-shelter consumption expenditure of the bottom 20% income group in each year. For years before 2004, it is averaged of those of bottom 10% and bottom 10-20% group. • To determine the standardized shelter costs, we compute the mortgage payment for a 25-year loan of 80% value of a mean-priced housing at construction space size of 90 m2. • The monthly shelter cost is the combination of the monthly mortgage payment and monthly housing maintenance costs. • Housing-related maintenance charges are using average values of each year. China Urban Land and Housing in the 21st Century, HK Dec.2007

48. Monthly standard shelter costs and MNSB (minimum acceptable non-shelter consumption) budget in Shanghai, 2000-2006: unit RMB, for 25-year (80%) mortgage of a mean-priced housing sized at 90 m2. Note: assume household size = 3, mortgage interest rate is set at the borrowing year China Urban Land and Housing in the 21st Century, HK Dec.2007

49. Housing-induced poverty incidences in Shanghai, 2000-2006 The numbers are what the after-shelter incomes -MNSB. If negative, as those numbers with parentheses, the households are falling in housing-induced poverty. China Urban Land and Housing in the 21st Century, HK Dec.2007

50. Maximum affordable housing costs in Shanghai 2000-2005 Maximum affordable housing cost, the which level below a household will not fall in the housing-induced poverty after paying their housing costs. China Urban Land and Housing in the 21st Century, HK Dec.2007