Expensive Zip-Codes: China’s Burgeoning Real Estate Market in First-Tier Cities

In the world’s second largest economy, real estate plays a substantial role for both commercial and private investment: due to lack of diversity in investment strategy, the private real estate market in China has become a favored path for private owners trying to maintain and invest their assets. However, throughout China, an increase in the growth of real estate prices has forced the government to take steps to try and keep the growth steady while keeping prices statistically viable and affordable to the population as a whole.

In large cities such as Shanghai, property taxes and home-buying restrictions were introduced, along with increased funding for subsidized housing in 2011; these initiatives aimed to curb speculative buyers of second properties. However, loopholes remained within this system, which many utilized as a way to acquire coveted second property investments. For example, many of the disincentives in acquiring a second property were geared against households. With a divorce, however, lovers could technically manage two properties in their portfolio. Despite continued efforts to reduce the increase of second property owners, according to Financial Times, the percentage of private owners who owned a second property in first-tier cities increased from around 29% to around 36% (since Quarter 4 of 2015 to Quarter 1 of 2018).

Potential social problems come from the imbalance between the vacancy of housing units, the disproportionately small yield of rental property, and increasing property prices. Over 40% of multiple-property homeowners polled by Financial Times in 2018 claimed that they owned vacant property. However, the rental yield percentage hovers at around 1.5% in large cities such as Shanghai. This, coupled with a 12% increase in housing prices (from the end of Quarter 2 in 2015 to Quarter 1 of 2018) - despite efforts to stabilize the market - means that housing is becoming increasingly unaffordable for its middle and lower-class citizens.

In order to rent the properties out, private Chinese investors would need to shoulder heavy decoration and furniture costs out-of-pocket. Instead, private investors would rather hold onto their properties as shells: financial vehicles of storing and investing their wealth.

These inequities become even more complicated as taxes are met with wary confidence in the market. Over one-fifth of responders in first-tier Chinese cities claimed that they would sell secondary property in the event of increased taxation. Chinese officials are careful to make moves on the real estate market as many citizens use property as their primary investment. Increased taxation could lead the wealthy to sell their properties, causing an inundation of property in the market - quickly collapsing real estate investment gains over the past couple of years.

However, increased housing prices and low rental yields mean that first-tier cities’ less wealthy populations must confront the reality that cities like Shanghai may no longer be financially viable. Many experts claim that Chinese real-estate has become an investment ‘bubble.’ Yet even so, if treaded carefully, investors can hope to maintain steady gains. Despite a six-month plateau in December of 2017, investor confidence remains firmly in the real estate market, and as a result, the prices of property continue to rise. Gains are quick, and prices are rising. Even so, it is unclear how China will maintain first-tier cities’ real-estate markets as a sustainable place of growth in the long-term.

Sources: SCMP, China Daily, Bloomberg, Nikkei Asian Review, Shanghai Flash, Reuters, Forbes, Financial Times (China’s Property Tax Push, Shanghai Needs a More Resilient Market)