The market for real estate in China has seen a dramatic change. In the past, it was the case that Chinese workers were promised secured housing by the communist regime. But, the recent trend in Chinese real estate has rendered the real estate market unattainable for the middle class, which makes it a completely new playing field.

The market has completely changed from capitalism to socialism. This radical shift in the Chinese real property market was explained within this piece.

Communism

It is believed that the Chinese property market tells a fascinating story about the development of capitalism with a hardcore character in a communist state. In the beginning, i.e., 1978, Chinese real estate had no price. It was due to the fact that all land within the China state of China was held by the state. The Chinese Constitution prohibited the private ownership of land and the transfers of land.

So, there should never be any buy-and-sell transactions. All employees were employed by the government. They would therefore be offered housing based on their age, years in service, and the size of their family, in addition to other variables. In the present, it was impossible to anticipate that in the future, China would be one of the most important real estate markets around the globe and eventually become the leading example in debates about natural bubbles in the real estate market.

Privatization Takes Over

Things started to change slowly with the socialist economic system of China. The economy was no longer socialist after 1988 when the constitution was changed. Laws that did not allow personal ownership of land were modified.

The most recent laws have divided the land into two classes:

1. A separate category was reserved for those from low-income households. These homes were sold on a cost-plus basis. Additionally, the government was to be able to keep an eye on the expenses incurred while the construction of these homes. Developers who developed and completed these projects with no problems could be eligible for tax credits in the identical. Ideally, these homes would be sold at a premium of 5% over the price of the house to households with low incomes. However, there were some restrictive conditions that made it difficult to get an investment. Additionally, getting out of the property was challenging because the government banned selling these houses for at least five years following the purchase.
2. Other types of places offered for sale were the homes marketed as commodities. The market influenced this type in the housing market, i.e., investors could purchase and sell their homes at any suitable price. Meanwhile, they could let these properties out. The law on rent control of 1994 completed the transition of a portion of the Chinese real property market from socialist to capitalist.

Property Boom

In the following two decades, they witnessed one of the largest real estate booms the world has ever seen. The amount of affordable homes that are controlled by the government within the economy has been shrinking steadily. In the course of time, they’ve been replaced by the housing of commodities. Although the availability of houses that are primarily constructed has expanded throughout Chinese urban areas, so too have their costs.

The price increase average for more than twenty years was double-digits each year. This means that the costs of homes have risen by eight times or more during the past twenty years. In several cities, there has been an average at or above 26% compounded annual rate of growth for nearly two decades! This is considered one of the most significant and longest-lasting bull runs ever occurring in the global real estate sector. The rapidly increasing prices of real estate made it beyond the reach of the middle classes. This led China’s Chinese government to enforce stricter laws.

Strict Laws on Second and Third Home

It is believed that the Chinese government has implemented strict laws to limit the acquisition of third or second homes in the majority of Chinese cities. These laws were put in place to ensure that the poor first-home borrowers weren’t competing with wealthy third or second-home buyers.

The laws stipulate that those who purchase their second residence must pay an investment that is at 60 percent of their home’s value. In the same way, if a buyer buys a third home, they will not be able to finance the purchase and will be required to make the total amount payable in cash.

This law had a significant impact on the sale of houses in cities of tier-1 and tier-2. The rapidly increasing prices for homes rapidly experienced an improvement. China also experienced its first real estate crash this time!

Stimulus Package

In 2008 the Chinese government announced an economic stimulus plan to revitalize the banking sector and increase lending. But, it resulted in a further increase in the cost of real estate, which the government had tried for so long to control. The banks were flooded with cash and real estate developers seemed to be keen to borrow, and as a result, a large amount of money was given to them at a rapid rate. In a brief time, the recession quickly morphed into an economic boom. But, the crash was very short-lived.

Misallocation

The Chinese developers constructed massive townships and gated communities. The majority of them were built for people of higher income because there is a minimum amount of government regulation within that price area. But, the upper class still needs to buy the houses. This is why China now has whole cities and towns ready to be inhabited. However, they haven’t been used for habitation. They are often called ghost cities by a variety of economists and are one of the biggest misallocations of money in the time of the centrally-controlled Chinese economy.

As of now, certain towns in China are seeing a drop in the value of their homes, whereas prices have remained stagnant in other cities. If the sentiment in the market is to be believed, China is poised to experience a significant correction in property prices.