China’s real estate market has changed dramatically. At one time, Chinese workers were guaranteed housing by the communist government. The recent trend in Chinese property has made it unaffordable for even middle-class employees who are highly paid, making it a totally different ballgame.

This is a complete change from socialism to capitalism. This article documents the dramatic change in China’s real estate market.

Communism

The rise of capitalism in China is a fascinating story. At first, the Chinese real estate market was a non-existent one. In 1978, Chinese real estate had no price. The government owned all of the lands in China. Chinese law prohibits private land ownership.

There could be no buy-sell transactions. All employees also worked for the government. Housing would be allocated based on factors such as seniority, years of service, and the size of the family. It was impossible to predict at this point that China would one day become the largest real estate market in the world and that it would be used as a major example in real estate bubble debates.

Privatization Takes Over

Slowly, the socialist economy in China began to change. In 1988, after the Constitution Amendment, the economy was no longer socialist. The laws that prohibited private land ownership were amended.

The new laws divide the land into two categories.

1. One category was set aside for people from lower-income households. These houses would be sold at cost plus. The government would also keep a close eye on the cost of building these homes. Tax credits would be given to developers who successfully created and implemented these projects. Ideally, these houses would be sold to low-income families at 5% over the cost price. There were, however, strict conditions that made it difficult for one to qualify. It was also difficult to leave such a house, as the government did not allow it to be sold for at least five years following its purchase.
2. Other types of housing being sold are commodity housing. Markets, i.e., dominated the real estate market; investors could buy and sell properties at any price they chose. During this time, investors could also rent these properties. The Rent Control Act of 1994 marked the end of socialism in a certain part of the Chinese realty market.

Property Boom

In the next two decades, the property boom was one of the largest in history. The number of affordable housing units controlled by the government has steadily decreased. They have gradually been replaced by commodity housing. Although the number of houses in Chinese cities has increased, their prices have also gone up.

Over the past two decades, every year has seen a double-digit price increase. The prices of homes have increased at least eightfold in the last twenty years. In some cities, average annual growth rates have reached 26% for the past two decades. This is one of the longest and biggest bull runs ever seen in the real estate markets around the world. Real estate became out of reach for the working class due to rapidly increasing prices. The Chinese government responded by enacting stricter laws.

Strict Laws for Second and Third Homes

In most Chinese cities, the Chinese government has passed strict laws that limit the sale of second and even third homes. These laws were passed to protect first-time home buyers from being competed with by wealthy second and third-home buyers.

The law requires that those who are buying a second home make an initial payment of 60% or more of the property value. If the person were purchasing a second home, there would be no financing available, and they would have to pay in full.

This law has had serious consequences on housing sales in Tier-1 and Tier-2 cities. House prices began to fall after a rapid rise. During this time, China experienced its first real estate crash.

Stimulus Package

In 2008, China’s government introduced a stimulus package in order to stimulate its banking sector and encourage loans. This resulted in a rise in real estate prices, which the government had suppressed for so long. Banks were flush with money, and developers wanted to borrow, so a lot was loaned at a rapid pace. The bust turned quickly into a boom for a brief period. This boom, however, was very short-lived.

Misallocation

Chinese developers created gated communities, townships, and huge gated communities. The majority of these houses were built by developers for people in the upper class, as there are minimal government regulations at that price point. The elite class, however, has not bought these houses. China now has entire towns and cities that are ready to be inhabited. They haven’t been settled. Many economists refer to them as ghost towns, and they represent the largest misallocation in the history of the centrally managed Chinese economy.

Some cities in China have seen their property prices fall, while others have seen them stagnate. According to the current market sentiment, China’s real estate prices are about to undergo a major correction.