Evaluating Conditions in Major Chinese Housing Markets
Evaluating Conditions in Major Chinese Housing Markets
Jing Wu, Joseph Gyourko, and Yongheng Deng
NBER Working Paper No. 16189
July 2010
JEL No. P22,P25,R10,R21,R31
ABSTRACT
High and rising prices in Chinese housing markets have attracted global attention, as well as the interest
of the Chinese government and its regulators. Housing markets look very risky based on the stylized facts
we document. Price-to-rent ratios in Beijing and seven other large markets across the country have
increased from 30% to 70% since the beginning of 2007. Current price-to-rent ratios imply very low user
costs of no more than 2%-3% of house value. Very high expected capital gains appear necessary to justify
such low user costs of owning. Our calculations suggest that even modest declines in expected
appreciation would lead to large price declines of over 40% in markets such as Beijing, absent offsetting
rent increases or other countervailing factors. Price-to-income ratios also are at their highest levels ever in
Beijing and select other markets. Much of the increase in prices is occurring in land values. Using data
from the local land auction market in Beijing, we are able to produce a constant quality land price index
for that city. Real, constant quality land values have increased by nearly 800% since the first quarter of
2003, with half that rise occurring over the past two years. State-owned enterprises controlled by the
central government have played an important role in this increase, as our analysis shows they paid 27%
more than other bidders for an otherwise equivalent land parcel.
Jing Wu
National University of Singapore
and Tsinghua University
irswj@nus.edu.sg
Yongheng Deng
National University of Singapore
NUS Business School
Singapore 119613
ydeng@nus.edu.sg
Joseph Gyourko
University of Pennsylvania
Wharton School of Business
3620 Locust Walk
1480 Steinberg-Dietrich Hall
Philadelphia, PA 19104-6302
and NBER
gyourko@wharton.upenn.edu
1. Introduction
The dramatic rise in Chinese house prices has generated global interest. Figure 1's plot
of an index of real and nominal constant quality house prices across 35 major cities illustrates
why. Real prices increased by about 225% over the past decade, with just over 60% (or about
140 percentage points) of that rise occurring since the first quarter of 2007 (2007(1)). There is
no sign as yet of any slowdown in appreciation rates, with prices growing by a record 41%
(annualized) during 2010(1). There also have been repeated price records broken in Beijing
land auctions in recent months.1
This most recent escalation of the boom in China's housing markets comes amidst a
4 trillion yuan RMB (US $586 billion) economic stimulus program that was adopted at the
end of 2008 and has been credited with helping restore the country's economic growth rate
to an annualized 11.9% in 2010(1).2 Loan volume also increased sharply, with total loan
balances outstanding increasing by over 40% from the end of 2008 through 2010(1).3
Balances outstanding on residential mortgages and loans to real estate developers also
expanded at similarly high rates during the same period: by 38% and 50%, respectively, as
shown in Figure 2.
All this has prompted questions about whether there is a bubble in China's housing
market. The Chinese government has indicated its own concern via a series of policy
interventions over the past few months that include the following: (a) increased equity down
payment shares from 20% to 30% for first homes of more than 90 square meters in size; (b)
increased equity down payment shares from 40% to 50% for second homes; (c) general
discouragement of the use of any leverage on third homes or by external buyers (i.e., those
1 In mid-March of this year, record prices in Beijing’s residential land auction were established three times in one week. See
the reports from Reuters and the Wall Street Journal for more details.
2 Source: National Bureau of Statistics, China.
3 The total bank loan portfolio in China is categorized into domestic or overseas loans, with the domestic portion including
loans to households and enterprises. Loans to households include both consumer loans (such as residential mortgages and
car loans) and operating loans to households. Loans to enterprises include loans to residential property developers and any
other non-financial enterprises.
1
not living in the market of the intended purchase); (d) new rules to prevent developers from
hoarding housing units; and (e) preparation of the introduction of a local property tax, with
possible pilot implementations in Shanghai and Chongqing within the next one to two
years; this change could be very important because it would raise the cost of carry on
speculative investments in owner-occupied housing.4
While China's government clearly is concerned about the state of its housing
markets, determining whether the level of prices in any given market is appropriate based
on fundamentals is very difficult for a variety of reasons, not the least of which is that
economics does not provide a well-specified model of bubbles. In the case of China, data
limitations make the issue even harder to study and interpret. Time series on prices and
quantities are little more than a decade long because it is only since 1998 that there has
been a true private market with competitive bidding and pricing of property. This means
that it is not feasible to compare prices across cycles in Chinese markets. Effectively, the
available time series is one of a boom period.5
That said, there are some important strengths of the Chinese data. One is that we
observe sales of raw land, so that we can contrast what is happening to land versus the
improvements represented by the housing structure itself. Another is that the typical rental
and owner-occupied housing units tend to be similar in terms of size and their location
within dense, multiple story buildings in the same parts of metropolitan areas. This makes it
more straightforward to compare prices to rents than it is in the United States, where
owner-occupied housing tends to be low density, single family product concentrated in
suburban areas, while rental housing tends to be in high density, multi-family structures,
often located in central cities.
4 See details in “Gazette of Executive Meeting of the State Council,” December 14th, 2009; and “Circular of the State
Council on Resolutely Containing the Precipitous Rise of Housing Prices in Some Cities” (Decree No. [2010] 10), April
17th, 2010.
5 Flood and Hodrick (1990) were among the first to outline the onerous data requirements for formally determining whether
any type of systemic mispricing or bubble exists. It clearly is not feasible to conduct such a test with the available data on
Chinese housing markets.
2
Using micro data on over 300 recent residential land auctions in the capital city of
Beijing dating back to 2003, we are able to provide the first constant quality land price
series for a Chinese market. The estimated growth in land values is nothing short of
extraordinary—almost an eight-fold increase since 2003. It is also clear that this is not
simply a function of prices escalating prior to the Summer Olympics in 2008. Beijing's land
prices nearly tripled since the end of 2007.
We also are able to compare land prices to the values of finished home sales (i.e.,
land plus the physical unit) in nearby transactions. From 2003 through 2007, the ratio of
land to house values among our matched pairs hovered between 30% and 40%. In 2008,
2009, and early 2010, however, this ratio doubled to just over 60% on average.
There also is a statistically and economically strong positive correlation between
land auction price in Beijing and the winning bidder being a state-owned enterprise (SOE)
associated with the central government. All else constant, prices are about 27% higher
when a central government-owned SOE wins a land auction, so these entities appear to be
playing a meaningful role in rising land values in Beijing.
We also examine two traditional affordability metrics —price-to-income and price-to-
rent ratios—in Beijing and seven other large markets: Chengdu, Hangzhou, Shanghai,
Shenzhen, Tianjin, Wuhan and Xian. Urban income growth has been quite strong in China, and
has exceeded house price appreciation in Chengdu, Tianjin, Wuhan and Xian over the past few
years. However, prices in the coastal markets and in Beijing have outpaced even the high
income growth enjoyed in those places. The most recent data show price-to-income ratios have
reached their highest levels ever in Beijing, Hangzhou, Shanghai and Shenzhen.
Rents have not been rising as fast as house prices or incomes in any of the eight major
markets we study. Not only are price-to-rent ratios high in these places, they have increased
sharply in the past few years. The price-to-rent ratio in Beijing increased by almost three-
3
quarters just in the last three years, rising from 26.4 in 2007(1) to 45.9 in 2010(1).
Hangzhou, Shanghai, and Shenzhen also have seen their price-to-rent ratios rise sharply to
over 40. Prices also have risen faster than rents in the other major markets of Chengdu,
Tianjin, Wuhan and Xian, but they started from a lower base and remain in the 30s.
Poterba's (1984) asset market approach to house valuation suggests that the annual user
costs of owning have to be very low—on the order of 2.5%-3.3% of house price—to justify
prices that are 30-40+ times rents. Given what we think are reasonable assumptions about the
other parameters determining user costs, it appears that home buyers are assuming quite large
capital gains on their homes. This is not incredible on its face, of course, as real prices have
risen significantly in China in recent years. However, home prices do not always rise and
certainly not consistently at the high rates recently experienced in China. Even modest declines
in expected price growth would lead to large, double-digit percentage increases in user costs
and similarly large declines in implied price-to-rent multiples and price levels, absent a rise in
rents or some other countervailing change.
In this respect, our data also raise serious questions about the sustainability of home
values in Chinese markets other than Beijing. Increases of the magnitudes experienced in
most major markets over the past couple of years are sustainable only in presence of very
high on-going demand growth combined with limited supply. It is difficult to gauge
whether expected demand is outstripping supply because of very large internal migration
flows and limited data on long-run supply conditions in these markets. However, most true
fundamentals just do not change so discretely or in such magnitudes as to be able to explain
the sharp changes seen in land price growth in Beijing or in price-to-rent ratios in most
major markets over the past few years.
The plan of the paper is as follows. The next section provides background on the
history of housing reform in China, as well as the nature of its land supply system. This
4
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