Overproduction and Shoddy Practices Undermine Chinese Confidence in Housing Market

Overproduction and Shoddy Practices Undermine Chinese Confidence in Housing Market

By Jimmy Higgins. Posted September 18, 2022

For the last year the Chinese real estate giant Evergrande has been standing on the edge of collapse. It has paper assets of 350 billion dollars in real estate. It held the mortgage down- payment money for 1.1 million people in unfinished houses. Yet it has no money to pay its immediate creditors. For the last several months throughout China people have been refusing to pay their monthly mortgage payments to Evergrande and other companies.  20% or more of China’s GDP is connected to real estate, directly or indirectly. But for all the reasons listed below, Evergrande’s story is not just a Ponzi scheme or pyramid of taking in money and only paying part of it back out. And it is only one part of larger problems in China’s housing market.

CHINA AND THE WEST: HOUSING AND CARS

In the 20^th and 21st centuries new housing and the development of automobiles have been seen as the primary engines for moving an economy forward. It is a model developed in Europe and the United States followed by Japan and now China. The US auto industry claims it creates 100 jobs for each car produced. Until the 1950’s auto development in the United States was not a conscious industrial policy on a governmental level. What made the auto industry unique to American development is American geography. Trucks and cars could tie towns and villages into an existing rail system, and post WW 2 cities provided a link to building suburbs. The Eisenhower administration built the interstate highway system to consciously aid American development; I-80 and I-5 were built in the name of the National Interstate Highway Defense Act. The rationale was that in a future war we would need to be able to rush supplies and troops from coast to coast.

In Germany post World War I, the automobile was seen as a way to rebuild German heavy industry with the Nazi goal of rearming Germany. In postwar Japan, the auto industry was a conscious policy of Japanese heavy industry. Mitsubishi, for example, was a military aircraft producer. They were prohibited from building warplanes or ships, so they went into cars.

China’s economic developmental path took a different turn. There were two competing economic models, e.g., follow the pattern of the Soviet Union and build massive heavy industry first or follow the model of building agriculture, handicraft, and light industry to accumulate the resources to build heavy industry. The Chinese experimented with both models. The withdrawal of Soviet assistance to China resolved the issue. The majority of Chinese resources went into building agriculture infrastructure to feed people.

POPULATION

China’s current urban population is over 800 million people living in more than 220 cities of a million people each. By comparison the United States has just 10 cities of over a million; the 10th largest being San Jose. The US is about 96% urbanized (towns over 10,000), while China is 60% urbanized. At the founding of the People’s Republic of China in 1949 about 35% of the 450 million people lived in cities. With a few exceptions, the central government nationalized all the land of China and began a process of redistributing the population in 1954 to villages and towns. Migration between city and countryside was strictly controlled by Hukou(household registration card) and rice ration cards.

China’s economy was state-run until the late 1970’s. Urban housing was the responsibility of each state work unit. When I visited Shanghai in 1984, Shanghai #1 Department store had its own housing with single workers living in male and female dorms. Your base rent was 5% of your income, but the waiting time for an apartment was six to eight years. The earliest forms of privatizing housing allowed work units and then banks to finance buying on the private market. In China, then and now, land is sold as 70-year leaseholds. The state still owns the land. Today BOTH state collective enterprises and private developers buy land. Housing construction is usually Hong Kong style narrow vertical buildings seven to 30 stories high, six apartments to a floor.

There are some estimates that the Chinese economy has 25% of its growth related to housing, both in real estate investment and the real cost to move in residents. Thousands of workers beyond just those who build the outside, and thousands of workers are employed in building the furnishings that go into these apartments. Apartments are sold with bare concrete walls, no kitchens, no plumbing, cabinets, toilets, closets, or flooring. If you want an electrical outlet, you have to chisel a path from the main junction box in the concrete wall, then put the electrical pipe in and then re-cement the wall. To cover the sewer pipe from the apartment above in your living room, you build a false ceiling. Once you finish it YOU have now lowered or destroyed the resale value. Who wants to live in the kitchen and bath and closets that somebody else used for twenty or thirty years?

In cities, housing is regulated by the city housing bureau. From the 1950’s the central government moved from assigning people rooms in existing houses to building housing estates where work units could build and assign housing. In the late 1980’s, housing construction exploded from three and five story state construction to skyscrapers that were 15-30 stories high.  Now it is primarily market controlled with the state intervening to stop rising house prices and mandate affordable housing. Corruption exists in the housing bureaus. Relatives of the people running the housing bureau snap up the affordable units or in one case in Guangzhou, someone’s 10-year-old child and wife had title to 19 houses!

The central government is continually creating rules and regulations to control housing. Several years ago, the government announced that all mortgage rates – new and existing- in China were being raised 1.0%. There was a rule if you bought a second house, the 20% down-payment was raised to 30%. There was a rule to tax the family’s second house. That led in 2017 to a brief period where people were getting a divorce so the wife could buy a property in her name and then remarry. In a brief period in Shanghai the divorce rate tripled. Many women decided not to remarry their husbands. The divorce rate in China is very low, and now that these women had a house in their name, many reconsidered their relationship. To reduce the cost of a house there is a new rule that most housing units be partially finished with closets, electrical wiring, and concealed plumbing pipes, etc.

                                                    
EVERYONE IS IN THE GAME TO OPPOSE CHANGING THINGS

Here are factors that make China’s housing market chaotic and crazy:

*Banks are required to fund state run enterprises with loans that will never be paid back so they are eager to make their books look good by loaning money to anyone.

*Developers borrow just 25% of the money they need, and they finish construction by hopefully selling the building apartment by apartment. In many cities there are buildings that never get finished. Developers NEVER have enough money on hand to pay their construction crews. [Evergrande is guilty of this in a major way]

*Cities and villages make money by selling land and charging a one-time transfer tax. Unlike the US, China is just now experimenting with annual property tax.

*State Collective Enterprises, including schools and universities, and people misuse the money they receive to get the highest rate of return. They don’t invest in production but invest in the real estate market with its 11% rate of return as opposed to 4% in bank savings accounts. In the world-wide 2008 recession, a lot of the government “pump-priming” of state enterprises went to buying real estate and not building productive capacity.

* Homeowners. Like Silicon Valley real estate, my Chinese in-laws have seen their Shanghai house rise 800% in value since 2001. In a survey the most desirable male to marry in Shanghai is someone who owns a house and has a government job.

*Migrant workers. You plant at spring festival when you go home. You return to your home at the October 1^ST holiday (China’s National Day) to harvest the crops. Your wages are three times what you could earn if you only worked in the countryside. In many cases, your housing is made from the bricks that you use to construct the buildings – you move into the buildings you are constructing. In winter months there is no incentive for you to finish the building earlier than spring festival next year!

WHAT THE GOVERNMENT MAY DO ABOUT THE HOUSING CRISIS

To all of the above, Xia Bin, the retired director of the China State Council Development Research Center, offers some solutions (China Voices #58). He acknowledges that relying on rising house prices is not sustainable for four reasons. One, they are unaffordable in many cities. Two, in some cities there is an oversupply. Three, some companies have no money to buy or finish housing. And finally lower sales decrease local government income.

He proposes following Xi Jin Ping’s comments “Houses are for living, not speculation.” The national government should ensure rentals and government subsidized housing for low-income groups, including migrant workers. Homes must be “occupant ready.” Finally, the government must organize a national group to develop long-term development policy. He also suggests the central government will not tolerate failing developers forever and that some of them will be allowed to go bankrupt.

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Author’s bio: Jimmy Higgins is a longtime activist involved in the US China peoples friendship association. He has lived in China over five years. Has traveled from Hainan to Heilongjiang , Inner Mongolia to Taiwan.