Situation of the chinese real estate market (market, hukou, construction and urbanization, loans and morgages, shadow banking, Income levels ratio to rent and sales, Challenges) presentation powerpoint Abstract: 17% annual growth rate on average (2004 - 2013) Hukou system Resident card for Chinese cities; Allows access to public services (e.g. schools), plate numbers (driving) and other benefits (retirement pensions, healthcare). Easy to obtain for graduates and household owners, not for unqualified migrant workers; Intend to control rural emigration; Generates inequalities between rural and urban populations; Gives incentives for wealthy people from rural areas to invest in big cities’ real estate in order to upgrade their Hukou. Oversupply Overall vacancy rate estimated between 22% and 27% in 2015*. Between 20 and 50 « ghost cities » (vacancy rates between 50 and 90%)** Amplified by: 1- Low interest rates on loans and mortgages; 2- Need for local governments to finance themselves by selling lands. 3- Strong growth of housing prices vs low rental returns leading to speculation (buy, keep new & eventually resell). Fluctuations explained by changes in government’s regulations between low to high interest rates. Both factors have created a surge in construction rates and fast increases of market price leading to speculation. Financing Household debt-to-GDP : 47% in 2017 vs 39% in 2015 (Corporate debt 169%) Household consumption : 37%, vs 70% in the U.S. (Tham and Chaterjee, 2017) Local governments (LGs) debts at +120% between 2010-2014 (even if Beijing forbid them to raise large amounts of money). rely for 35% of their GDP on the sales of lands. Shadow banking Down payment for obtaining a mortgage in China: 20% to 40% Individuals borrow founds from unregulated shadow banks and use it as down payment for their mortgage (leveraged debt) in order to access property. Intermediaries: Property developers, real estate agencies, and P2P lenders provide loans, package them and sell them as wealth-management products, to millions of individual investors. (Huang, 2016). (Short-term household loans +243% (1.6 trillion RMB) in the first 10 months of 2017). As real estate is recently showing signs of downturns, local governments have borrowed money from state banks, bond markets and lightly regulated underground institutions to repurchase lands.

1. Arthur MEUNIER – arthur.meunier@cpe.fr & Sergey IVANOV
https://www.linkedin.com/in/meunierarthur
The Chinese Real Estate Market
A Growing Bubble
January 2018

2. 2
Outline
Introduction
Situation of the housing market
1- Buying
2- Renting
3- Hukou System
4- Construction & Urbanization
5- Oversupply
Financing
1- Loans & Mortgages
2- Shadow banking
3- Income level comparison
Government’s intervention
Conclusion

3. 3
Introduction
 Property & construction account for
15% of China’s GDP (35% with
auxiliary industries)
(Anderlini, 2015 & Cao, 2014)
In 2018:
 Infrastructures’ modernization and
urbanization to sustain growth on the
mid-term.
 Mid to long term Loans & Mortgages have been increasing by a yoy 13% to
15% since 2013. (Tham and Chatterjee, 2017)
 Impacts 40 other industries (Chen and Glenn,
2017)
 Household debt to GDP at 47% (Q2, 2017)

4. 4
 Not possible to own land in
China (99 years bails)
 17% annual growth rate on
average (2004 - 2013)
 In comparison: Average 11%
growth in individual income
& 10% growth in GDP
(Fang, Gu, Xiong, and Zhou 2015)
 Abnormal growth rate
compared to other economies
(+120% since 2010)
In October 2016 Shanghai had a year-to-year growth of 27.82%,
Beijing 23.5%, Guangzhou 15.9%, and finally Shenzhen had an
astonishing growth of 65% during the year 2016.
(Colliers International, 2017)
Housing Market: Buying

5. 5
Housing Market: Buying
From 2005 to 2016, for
main cities:
 + 923% Shenzhen,
 + 404% Shanghai,
 + 363% Beijing
 + 216% Tianjin
 + 204% Wuhan

6. 6
Housing Market: Renting
 Rental prices do not
follow prices for
buying new.
 Large vacancy rates
(unrented) observed in
big cities (Speculation
on buying/selling).
 Need « 2 lifes » to pay
back loans by rent.

7. 7
Housing Market: Renting
 Return on investment by
renting bellow 2% after taxes
(ITT, RET & BT).
 Usually considered « safe » if
up to 5%.
 Governement policies to fight
vacancy is pushing up
availibility.
 Xiamen ROI by renting: 100
years.
 Beijing : 72 years (Yangpeng, 2017).

8. 8
The Hukou System
 Resident card for Chinese cities;
 Allows access to public services (e.g. schools), plate numbers
(driving) and other benefits (retirement pensions, healthcare).
 Easy to obtain for graduates and household owners, not for
unqualified migrant workers;
 Intend to control rural emigration;
 Generates inequalities between rural and urban populations;
 Gives incentives for wealthy people from rural areas to invest
in big cities’ real estate in order to upgrade their Hukou.

9. 9
Construction & Urbanization
 100 billion sq. feet of floor
space built (2003-2014)*.
 5.5 million new apartments
per year.
 16% of the country’s
migrant workforce was
involved in construction
industry (8% in the United
States, 13% in Spain)
 About 780 million urban
populations. *(Sources: National Bureau of Statistics of China 2014
& Chivakul et al. 2015)

10. 10
Oversupply
 Overall vacancy rate estimated
between 22% and 27% in 2015*.
 Between 20 and 50 « ghost cities »
(vacancy rates between 50 and
90%)**
Amplified by:
1- Low interest rates on loans and
mortgages;
2- Need for local governments to finance
themselves by selling lands.
3- Strong growth of housing prices vs low
rental returns leading to speculation (buy,
keep new & eventually resell).
* China family financial survey and Research Center, 2014 & “National
urban housing market survey report“, 2015
**(Chi and Al, 2015, ChuanChuan and al, 2016 & Cai, 2017.)

11. 11
 Fluctuations explained by changes in government’s regulations between low
to high interest rates.
 Both factors have created a surge in construction rates and fast increases of
market price leading to speculation.
 We saw previously that China’s GDP is very dependant of the construction
sector. A slow down would involves an economic’s contraction.
Oversupply

12. 12
Financing: Loans & Morgages
 Household debt-to-GDP : 47% in 2017 vs 39% in 2015 (Corporate debt 169%)
 Household consumption : 37%, vs 70% in the U.S. (Tham and Chaterjee, 2017)
 Local governments (LGs) debts at +120% between 2010-2014 (even if Beijing forbid
them to raise large amounts of money).
 LGs rely for 35% of their GDP on the sales of lands.

13. 13
Financing: Shadow banking
 Down payment for obtaining a mortgage in China: 20% to 40%
  Individuals borrow founds from unregulated shadow banks and use it as
down payment for their mortgage (leveraged debt) in order to access property.
 Intermediaries: Property developers, real estate agencies, and P2P lenders
provide loans, package them and sell them as wealth-management products, to
millions of individual investors. (Huang, 2016).
 (Short-term household loans +243% (1.6 trillion RMB) in the first 10 months of
2017).
 As real estate is recently showing signs of downturns, local governments have
borrowed money from state banks, bond markets and lightly regulated
underground institutions to repurchase lands.
 Illegal but tolerated as it allows artificial growth and prices’ control.

14. 14
Financing: Income level comparison
 Price/Income ratio in 1st/2cd tier cities about 8 in 2011.
 Level similar with Japonese housing bubble (1989) (US subprimes: ratio = 3)

15. 15
Governement’s intervention
 More governemental intervention after international press get interest for
ghost cities (Ordos, Dantu..)
 2010: No more than 2 properties by couples (led to an increase in divorces
rates).
 Major cities have to publish housing market price to keep it under control.
 Raised in required down payments and mortgage interest rates (led to more
shadow banking in 2017).
 April 2017: newly bought houses must be held more than 4 years before
being resold (avoid domino effect in case of panic).
 The government announced several times that it intends to purchase unsold
properties, and turn them into low-cost housing, measure that might lead to
a fall of the market price (Shepard, 2016).

16. 16
Conclusion
Bubble characteristics
 Abnormal growth rates;
 Oversupply and high vacancy;
 Important speculation;
 Shadow banking and bad debts;
 GDP artificially driven by real estate sector and associated loans;
 Most of the individual’s wealth invested in real estate (See: The Chinese
Equity Market presentation)
 Risk for Chinese economy from the real estate sector notably in
case of economic downturn (falling GDP growth).