The real estate sector in China is a key part of the Chinese economy. Due to the gradual market opening and government stimulation of the housing sector over the last decades, real estate development has experienced a long-lasting boom.

In 2018, total sales of the real estate market reached almost 15 trillion yuan and accounted for nearly 17 percent of China’s GDP.

With housing prices growing rapidly in all parts of China, economists have long been debating whether or not the housing market is forming an ever-increasing price bubble, which is likely to burst one day. However, the development of the real estate sector is backed by several fundamental trends, which make a crash of the market less likely.

Most important is the constantly advancing urbanization in combination with equally increasing GDP per capita, which leads to sustained demand for new housing. As a matter of fact, housing prices on a national level are rising at around the same rate as the GDP per capita. The growth in income has affected all social classes, which makes acquiring housing property possible even for lower-income groups.

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Most Chinese view housing not merely as a commodity, but as an investment in an ever-appreciating asset and people invest a large part of their savings in real estate. For the government, the real estate market is equally important. Not only is housing a key part of the national economy, local governments also generate 20 to 40 percent of their fiscal revenue from the sale of land rights.

Furthermore, a considerable part of all bank loans in China is property related. Out of these reasons, the development of the real estate sector is crucial for economic stability and the government is making considerable efforts to control and stabilize the market.

In many Chinese cities, however, real estate prices have reached breathtaking levels. In these markets it is not very likely that the appreciation of prices will continue at the rate they did in the past. More likely, prices will rise at a slower pace. In case of economic uncertainty, moderate price corrections might also occur.

At the same time, prospective buyers are focusing more on quality, as many of them already possess the property and now want to improve their living conditions. For the foreseeable future, it appears the secondhand market and property-related services will continue to gain momentum in this environment.

• History of the Chinese Real Estate Industry
• Real Estate in China Overview
• Is there a Real Estate Bubble in China?
• Where are Chinese Investing in Real Estate?
• Can Foreigners buy Real Estate in China?

History of the Chinese Real Estate Industry

The government of China first began real estate development in 1981. After the abandonment of a policy requiring government agencies and corporations provide permanent residence to their employees, the real estate industry officially entered a Golden Period.

Moreover, to help real estate corporations pass through the economic crisis of 2008, new regulations were introduced by the government, as a result of which residence trading boomed and the real estate industry peaked.

From 2008 to 2012, residence prices grew steadily, and from 2013 to 2015, owing to the austerity measures that the Chinese government introduced, the speed of real estate growth slowed down.

However, the real estate market awakened from its ‘downtime’ in 2016. Sales in the first six months was 4,868.2b RMB – a 42.1% increase compared to other years. Currently, the Chinese real estate market is still vital, even though the global economy is relatively down.

Real Estate in China Overview

Urbanisation leading to massive consumer demand 

China has the largest population in the world. This means consumer demand will not be satisfied easily. This demand can be divided into two parts – residence in urban area acquisition and residence improvement.

According to census data, China’s urban population totals 0.77 billion, or 56.1% of the population. By 2020 60% of Chinese will live in urban areas. There is no doubt the amount of residence acquisition will continue to increase, and provide more spaces for real estate market growth.

As many people earn greater incomes, the satisfaction for residence improvement (mainly the satisfaction for average living space per person) also needs to be fulfilled in a short time. In most developed countries, the average living space for one individual is 387.36 to 667.12 square feet.

The Chinese government is dedicated to providing the same, and based on primary estimate, this goal will be accomplished by the end of 2020.

Provincial governments: A financial pillar

Not only market factors, but monopolistic control of the real estate industry by the provincial government
is another reason behind high real estate property prices. The land-transfer fee collected by the provincial government before October in 2016 totaled 2,654.6 billion RMB, which is 88% of their revenue.

On the other hand, many different types of taxes, like increment tax on land value, urban land utilisation tax, tax on the occupancy of cultivated land, and deed tax, are also real estate taxes. The total revenue from all taxes mentioned above is 3,044.8 billion RMB for the first ten months in 2016 and accounts for 41% of the public budget.

Approximately 40% of the provincial government’s revenue is from real estate. Without a fundamental economy restructures, it is unlikely the real estate market growth will be shifting into a side that does not favor the government.

Market differentiation and macroscopic adjustment

Compared to west China, the economy in east China is more developed. This causes real estate market differentiation. First and second-tier cities have certain advantages in infrastructure, including a full set of public facilities, high level of income, advanced education – as such they attract many new residents.

The real estate markets in these cities have a tight supply pattern. However, third and fourth-tier cities which only have relatively developed economies, face pressures caused by population loss.

To encourage the growth of the real estate market – and to enhance the control of property in different market categories- the government is prioritising policies to encourage development of third and four tier cities.

In addition, new policies including ‘limited purchase, limited mortgage, limited price, and limited sale’ are designed to prevent the real estate market in first and second cities from becoming overheated.

In order to ensure the good will of residence trading in the market, central government defines “rental right” as the tenant having the same right compared to the residence owner in obtaining basic services provided by community.

The government defines “joint right” as the residence purchaser paying part of the total price of sale alongside the government – according to this arrangement both are owners of the property simultaneously.

Finally, to restrain speculative investment, an enhanced property tax policy has been created and will be implemented in Shanghai and Chongqing. In addition, the number of ‘Pilot Cities’ will be increased. With the help of macroscopic adjustments, residence price increases in first and second tier cities are slowing down.

Third and fourth-tier cities have a larger amount of residence reservation release policies to encourage more people to settle down. Many new policies, for example, residence purchasing rebate, low percentage of down payment, and mortgage rate preference, etc. could not be more helpful in saving the local market and resolving storage problems.

Is there a Real Estate Bubble in China?

Even the coronavirus hasn’t stopped the world’s biggest asset bubble from getting bigger.

After a brief pause during coronavirus lockdowns in February, a Chinese property boom in some megacities that many thoughts was unsustainable has resumed its relentless upward climb, with prices rising higher and investors chasing deals despite millions of job losses and other economic problems.

In March, 288 apartments in a new Shenzhen property development sold out online in less than eight minutes. A few days later, buyers snapped up more than 400 units in a new housing complex in Suzhou. In Shanghai, apartment resales neared a record high in April, by one estimate. One Saturday last month, nearly 9,000 people each put down a deposit of one million yuan ($141,300) to qualify to buy apartments in a Shenzhen development.

“I barely had time for lunch on weekends in March” when the market started bouncing back, said Zhao Wenhao , a Shanghai-based agent at Lianjia, one of China’s largest real-estate brokerage firms. Many clients worry China’s currency will depreciate in the global economic slowdown, he said, driving even more money into housing as a haven.

The resulting asset bubble, many economists say, now eclipses the one in U.S. housing in the 2000s. At the peak of the U.S. property boom, about $900 billion a year was being invested in residential real estate. In the 12 months ended in June, about $1.4 trillion was invested in Chinese housing. More was invested last month in Chinese real estate than any other month on record.

The total value of Chinese homes and developers’ inventory hit $52 trillion in 2019, according to Goldman Sachs Group Inc., twice the size of the U.S. residential market and outstripping even the entire U.S. bond market.

The market’s coronavirus pause didn’t last long. Urban home prices in China were 4.9% higher in June than in the year-earlier period. Year-to-date investment is up 1.9% in the first half of the year, despite a huge drop in sales in February. On Thursday, China said its overall economy grew by 3.2% in the three months ended June 30.

China Evergrande, the country’s biggest home builder, has raised its sales target for the year by 23% from its January estimate, after strong sales in March.

While the rapid housing-market recovery is good news on one level for Beijing, it is also a reminder of behavior that has long worried the central government, which has tried repeatedly to keep property prices from getting out of control. Chinese President Xi Jinping declared in 2017 that “houses are built to be lived in, not for speculation,” which became the guiding mantra for government housing policy.

Getting people to take that message seriously, though, has been hard. After a decade of rapid home-sales growth, fueled by borrowing, China’s household leverage ratio hit a record high of 57.7% in the first quarter. It was the biggest quarterly jump in the ratio, which measures families’ mortgage, consumer and other debts relative to gross domestic product, since the first quarter of 2010.

The central problem in China is that buyers have figured out the government doesn’t appear to be willing to let the market fall. If home prices did drop significantly, it would wipe out most citizens’ primary source of wealth and potentially trigger unrest.

That gives Chinese citizens who have enough money an incentive to keep buying because they believe property in large cities will remain the safest investment in China, regardless of the health of the broader economy.

“Property has hijacked China’s economy, so the government wouldn’t dare to push for a plunge in housing prices, even if that’s the most effective way to deflate the bubble,” said Chen Zhiyu , who works for an American retailer and is looking to purchase a property in Shenzhen.

“You gotta follow the money,” said the 37-year-old, adding that he has raised his budget for spending on property since the coronavirus pandemic helped drive up prices. “Whenever governments start printing money, asset prices will go up. In the U.S., you have a bull stock market, but in China, only housing prices will keep surging.”

Sales activity is also being driven by cash-strapped developers and the local governments that sell them land. Both need to gin up revenue to pay down debts or offset other problems and are cooking up more incentives to move properties.

No one is sure how Chinese officials can manage the problem without destabilizing the broader economy. Even if the market stays strong, it creates headaches for policymakers, who have had to hold off on more aggressive economic stimulus this year—which some analysts say is needed—partly because of fears it will inflate housing further.

Polling conducted by the China Household Finance Survey, based in the Southwestern University of Finance and Economics in Chengdu, suggests the coronavirus pandemic has encouraged the kind of buying Beijing worries about, with demand for property rising among people who already own multiple properties, even as it has dropped among those who don’t yet own any.

That is a telltale sign of speculative investment, according to Gan Li , a professor of economics at Texas A&M University and an expert in Chinese household finance.

“Speculative demand is on the rise because [people] view housing as a safer asset than the stock market or overseas assets,” he said. “They think it’s guaranteed. Because of the pandemic they’re actually consuming less, and saving more. So they’ll actually have more money available to invest. That will create an even larger housing problem.”

About 21% of homes in urban China were vacant in 2017—a very high proportion relative to international standards—which equated to 65 million empty units, according to the most recent data from China Household Finance Survey. Among families who owned two properties, the vacancy rate reached 39.4%, and among those that owned three or more, 48.2% were empty.

Rental yields—the proportion of a property’s value made annually by renting it out—are below 2% in major cities like Beijing, Shanghai, Shenzhen and Chengdu, less than can be made buying Chinese government bonds.

Even so, Shannon Bi , a 42-year-old English teacher, said the pandemic has pushed her to invest in a second home in Shenzhen sooner than she planned, because she worries about inflation. “You have to invest the money somewhere, or it will only depreciate,” she said.

Another buyer, Doris Tao , said she and her husband signed a contract in early May on a second home in Shanghai. She hoped that purchasing the apartment in a desirable school district would increase her chances of enrolling her 3-year-old son in a good elementary school.

“We’ve been paying close attention for months. Usually these flats were snatched the minute they became available,” said Ms. Tao, 32, who decided to buy the day after visiting the apartment. “We were so lucky to be able to buy this one. Our owner said she got another offer in full cash the night we signed the contract.”

Part of what is so worrisome to some economists is the speed at which China’s property boom has grown so large, and its tendency to keep climbing even during times of economic stress.

As recently as the 1990s, it was illegal under China’s communist system for most people to own homes. A State Council decision in 1998 abandoned the country’s system of employer-allocated housing, and homeownership took off.

By late last year, about 96% of China’s urban households owned at least one home, according to a Chinese central bank survey released in April, far exceeding the 65% homeownership rate in the U.S.

In some ways, the boom accomplished Beijing’s goals. It has boosted economic growth and created wealth for millions of middle-class Chinese families. It also gave local governments, which must turn over a major part of income-tax revenue to the central government, additional revenue from land sales to developers.

But the boom has taken investment dollars away from other industries competing with real-estate borrowers for bank funding. It also has saddled many families with debt. 

Globally, China accounted for around 57% of the $11.6 trillion increase in household borrowing over the decade through 2019, according to Bank for International Settlements data. The U.S. accounted for about 19%.

Home prices in some Chinese cities have reached levels comparable with some of the world’s most expensive urban areas. Average home prices across China reached 9.3 times average income in 2018, according to the Chinese Academy of Social Sciences, compared with 8.4 in San Francisco.

In Tianjin, a city of 15 million southeast of Beijing, apartments in upscale areas sell for around $9,000 a square meter, or about $836 a square foot, according to real-estate services company Savills PLC. That is roughly the price an average buyer would pay in some of the most expensive parts of London, even though disposable incomes are seven times as high in London as in Tianjin.

In essence, urban Chinese have bet everything on their homes. They now have nearly 78% of their wealth tied up in residential property, versus 35% in the U.S., where more people invest in stocks and pensions, according to a report by China Guangfa Bank and Southwestern University of Finance and Economics.

When the coronavirus pandemic hit China, many economists and property experts feared the moment of truth had arrived. Housing sales plunged by 36% in the first two months of 2020 compared with a year earlier, and many cash-strapped property firms were pushed over the brink. As of June 5, more than 200 small developers had filed for bankruptcy, according to state media.

Bigger developers and local governments rolled out incentives to bring buyers back. Since February, at least 26 of 32 Chinese provinces and regions have unveiled policies to boost their property markets, according to Huatai Securities, including looser down-payment requirements and subsidies for home purchases.

“While local governments are under pressure to prevent further surges in housing prices, what scares them more is a sharp decline,” said Gao Fei , general manager at real-estate firm Centaline Group in Tianjin.

They can ill afford to let the market go down. Income from land sales and related taxes on developers accounted for 52.9% of local governments’ revenue in 2019, a record high, according to Shanghai Yiju Real Estate Research Institute.

Yet, in a sign the central government disapproves of some of the loosening measures, in at least 12 cities, including Jinan and Guangzhou, documents detailing relaxed lending policies were removed from local governments’ official websites within days. One city in Shandong province backed off plans to provide subsidies to home buyers in mid-May, saying some parts of its plan “violate relevant requirements from senior officials.”

China Evergrande, whose enormous debts give it the largest interest bill in the world among listed nonfinancial stocks, according to Capital IQ data, offered discounts of 25% in February and 22% in March. Country Garden Holdings, another major developer, offered more than 17,000 new homes across China via social media with discounts of up to 50%.

Among China’s 34 largest developers, 27 reported a year-over-year increase of sales volume in May, according to data from China Real Estate Information Corporation.

More recently, incentives have been trimmed, though not entirely. At one development in Shanghai in mid-May, CK Asset Holdings offered prospective buyers a Huawei phone and vouchers of 20,000 to 40,000 yuan ($2,800 to $5,600) for future apartment-management fees.

In other developments, no discounts were on offer, and would-be buyers had to enter lotteries to access the smaller and cheaper apartments. China Vanke Co. sold apartments in mid-May worth a total of 148 million yuan ($20.8 million) within four hours online in a live-streaming show hosted by an actress.

Yin Haiping , who runs a property consulting firm in Shenzhen, said fear of losing out is driving more buyers to look now, with home prices in some desirable areas up by at least 10% this year.

Xu Xiaohua , a university lecturer in Tianjin who already owns a property there, just bought another apartment this month in Shenzhen. He paid 6.5 million yuan ($913,050) in cash in early May for the 50-square-meter (538-square-foot) property after checking out about a dozen apartments within a week.

He said he thinks most Chinese will park their wealth in real estate during downturns. “The worse China’s economy turns,” he said, “the higher property prices in places like Shenzhen will climb.”

Where are Chinese Investing in Real Estate?

The trade dispute between the U.S. and China reached a fever point in recent days, as Washington and Beijing have gone tit for tat in imposing higher tariffs on imports.

Concerns that the two countries would not resolve the dispute sent the Dow Jones Industrial Average DJIA, 2.06% and the S&P 500 SPX, 1.83% reeling Monday, before staging modest rebounds Tuesday and Wednesday.

Chinese investors have been the biggest purchasers of U.S. residential real estate for six consecutive years, but President Trump’s trade war, and China’s efforts to reduce its national debt and boost economic growth, could change that.

And if the impasse continues, the effects could be even more far-reaching. “The Chinese government could place stricter capital controls about taking money out of China and buying in America,” said Lawrence Yun, chief economist at the National Association of Realtors. China’s government has already put pressure on Chinese nationals to reduce their commercial real-estate investments.

Meanwhile, the U.S.-China trade dispute has sent the Chinese yuan USDCNH, -0.21% to new lows relative to the dollar. “It’s already making U.S. real estate more expensive” for Chinese buyers, said Michael Fratantoni, chief economist at the Mortgage Bankers Association.

The trade war also adds to U.S. economic uncertainty at a time when real-estate demand is weakening even in some of the country’s hottest housing markets.

China has become the largest foreign buyer of U.S. residential real estate

In 2014, China supplanted Canada as the source of the largest share of foreign buyers of U.S. residential real estate, according to data from the National Association of Realtors.

In 2018 dollars, Chinese buyers accounted for roughly 25% of total foreign investment in U.S. residential real estate. Canada was No. 2 at 9%.

Of the 284,000 properties sold to foreign buyers last year, some 40,400, or 15%, were bought by Chinese nationals. Five years earlier, Chinese nationals had purchased 23,075 homes, representing just 12% of all properties sold to foreign buyers.

Even China’s growing share in recent years represents a small percentage of overall investment in U.S. residential real estate. As of 2018, foreign buyers in aggregate accounted for just 3% of U.S. home sales, the association added. That figure had been rising, but experienced a modest decline between 2017 and 2018. The figures for 2019 are expected to be similar to the 2018 levels.

Long before the current trade dispute, the Chinese government had been creating hurdles for its citizens who wanted to invest abroad. The country started restricting outbound investments in 2016, allowing residents to take only the equivalent of $50,000 out of the country, as a means of propping up the country’s currency.

This not only made it more difficult to purchase real estate in America but prompted some Chinese investors to sell their U.S. assets.

A Chinese pullback could have serious effects for some West Coast markets

Unlike foreign buyers from other countries who spread their investments more evenly across the U.S., Chinese residential real-estate investment is highly concentrated on the Pacific Coast. Nearly 40% of Chinese buyers have purchased in California, home to a large Asian community.

But California isn’t the only place where a fall in Chinese buyers would make a difference. Chinese nationals represent a significant share of the foreign buyers of residential real estate in the New York City metropolitan area and growing shares of buyers in states including Florida and Texas.

Chinese buyers also play a big role in the residential-real-estate markets of college towns, as more Chinese students have opted to study at American universities, Yun said.

However, a retreat by Chinese buyers could be good news for Americans looking to purchase a home, especially in such costly Golden State markets as San Francisco, Los Angeles and San Diego. These are among the most expensive in the entire country, and their popularity had contributed to double-digit home-price appreciation in recent years.

The rate at which home prices are climbing has recently slowed as buyers have struggled with affordability. The lack of competition from foreign buyers, who typically enter competitive all-cash offers, could provide an opportunity to get a better deal on a home for locals looking to buy.

Can Foreigners buy Real Estate in China?

or the past decade the housing market in China has been performing well, and homeownership has increased by 80%, a record high. As the growing number of Chinese have been buying property, foreigners planning to live long-term in China have also become interested in buying a property of their own.  

Unfortunately, regulations and laws under the Chinese government have made purchasing real estate in China very difficult for foreigners.  However, China’s slowing economy has changed the government’s approach to this.

Chinese Property Law & Obstacles Facing Foreigners

Chinese property law has undergone many developments with the most important being the creation of the 1982 Constitution. This document stated provisions for the “socialist public ownership” of any means of production. This means that the land in China belongs to the state and the collectives.  

Property investors may only obtain the right for land use through a 70-year term land lease.  In 2006, the government imposed a rule that prohibited foreign citizens working and living in China for less than a year from purchasing a home. This rule was established after an abundance of foreign home buying and property investment.  

The most recent development, in 2007, was the introduction of a new property law that for the first time protected the interests of private investors equal to national interests. Although this law was created, it is also stated that the Chinese government is entitled to make compulsory purchases of property for the purpose of new construction.  This is typically a risk for older properties.

A large number of Chinese regulations and laws has made property buying very strenuous for foreigners. In general, foreigners are only permitted to buy their own property after having worked or studied in China for at least a year.  Foreigners are only allowed to own one property in China and it must be used for dwelling purposes only.  

Commercial or industrial property may only be purchased after a company has been incorporated in China. There are also several extra taxes and fees involved for a foreigner, making the transaction even more difficult. In addition to a deed tax, city maintenance and construction tax, legal fees and a transfer fee, foreigners must also pay a notarization fee.

The Slowing Economy & Real Estate Bubble

China’s economy has become the second-largest in the world. With its rapid growth in the past three decades, it was anticipated that it would eventually slow down. According to the Wall Street Journal, the growth rate slow-down hit 6.9% for 2015, making it the slowest expansion in decades.  

China has a huge debt problem.  China also has control of its banks allowing China to power its economy through the financial crisis. The country’s total debt has increased 100 percentage points since 2008. One area that the Chinese government substantially supported with loans was development in construction and real estate.  

According to Fortune, the real estate sector accounts for between 25% and 30% of China’s GDP.  Due to this, property developers owe a large portion of China’s debt.  Residential developments were rapidly built in large numbers. 

More than 60 million apartments now sit empty because of the high purchase costs and yet, potentially rich foreigners still have strenuous restrictions on property buying.  As a result of the many unoccupied residences, developers have heavy repayment burdens.  The rapid growth of China’s economy may have created the largest housing bubble in history.

Government Response

The only way to restore the Chinese economy is to revitalize the real estate industry. In a move to boost the industry, the government has made several changes to encourage both foreigners and locals to invest in real estate. China has become more lenient with rules and restrictions on property sales to foreigners.  

Foreigners no longer require proof of living or working in China for at least a year. Limits on the number of properties purchased by foreign individuals and businesses are being ignored. This means that foreigners may now purchase properties for many purposes.  

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Housing prices started dropping, with a decrease of 4.5% in 2014.  Additionally, China’s cut on interest rates and the devaluation of the yuan may also likely attract investors.

Although the Chinese government is making changes to stimulate the economy, it will be a long process before any real noticeable results. The real estate sector is only one portion of the problem and foreign investors currently only make up a small percentage of property owners in China.  

However, the removal of the restrictions will encourage more foreign investors. Unfortunately, the slowing economy has made it both easier and less desirable for foreigners to buy real estate in China.  

For individuals and companies that have specific reasons for buying real estate in China, we would recommend the purchase as long as the decision is well thought-out and the location of the property is desirable and in a populated area.

Summary

To summarise, under the twin influences of both the market and government, the real estate industry is filled with uncertainty. Nevertheless, the market in China has lots of potential which means that demand can exist for a long time. The real estate market will continue to grow healthily and steadily.