China’s Property Crisis | Georgia L. Gilholy
At first glance, Ordos City in China’s Inner Mongolia province is nothing out of the ordinary. Like countless mid-level Chinese metropolises, its skyline consists largely of concrete high-rises that seemingly erupt from the surrounding countryside. They appear to have been built quickly and cheaply, as they were. On closer inspection, however, Ordos is missing the key component of city life: people. Indeed, for every one of Ordos’ 150,000 inhabitants, there are over 5 vacant homes. Nor is Ordos a rare example of such imbalance. Over one-fifth of China’s urban housing, about 50 million homes, currently lay vacant. But how is such a distorted person versus property ratio possible in a country whose homeownership rates outstrip the US average by almost 25 percent?
To many outsiders, China is perceived as a ruthlessly centralised bureaucracy, making up in efficiency what it lacks in transparency. This impression contains a strong element of truth. However, although all provincial and local authorities ultimately answer to Beijing, cities are responsible for enforcing and applying their own rules, including those relating to local budgets. Yet as with all areas of political life in China, Beijing rears its head. While cities must dish out for 80 percent of local expenses, 60 percent of their tax revenue is sent to central government. Cities are thus tasked with generating the re- quired income to make up these costs, despite being prohibited from taking out debt. This is where the not-so-small question of property enters the picture. Since the communist revolution, rural land has been “collectively”, or in reality, state-owned in China, and cities have the unilateral ability to “rezone” this land as urban, and sell it at artificially high prices. The market for this land does not consist of organic buyers, but “Local Government Finance Vehicles” (LGVFs).
These are shell corporations created by local authorities that allow them to take on “hidden” credit and make fast money from inflated land sales. In 2018 one-third of local government revenues in China came from land sales. LGFVs are legally required to develop on their purchased lands and tick this box by constructing cheap properties. Meanwhile local and national GDP increases correspondingly. While the central government in Beijing would prefer stability to these schemes- though evidently not enough to intervene in any meaningful way- lo- cal authorities become evermore occupied with amassing their own revenue, and there the struggle lies. But how did this inverted system not implode decades ago? Simply put, because the properties being constructed are being purchased.
But why are segments of the Chinese population buying up properties that they never intend to live in? Because for those on high and middle incomes in China, investing in real estate is a much safer bet than leaving one’s savings in the hands of unpredictable banks or the heavily state-skewed stock market. Furthermore, China’s post-one-child policy gender imbalance has resulted in there being nearly 34 million more males than females. This has created a competitive relationship climate where property ownership is one of the precursors to even being considered as a husband-to-be by most Chinese women. The gravity of this additional pressure is reflected by the fact that house prices are even higher in cities where the gender imbalance is more pronounced. It is this level of social urgency that means Chinese family, friendship and community groups often pool together in aid of purchasing property, allowing those on lower incomes to become homeowners.
These pressures are a direct result of the long-term meddling of China’s government at both the national and regional level. When Ordos’ empty streets made headlines in 2011, the Chinese state and its developers shrugged off the scandal by claiming that they are simply planning for the populations who will eventually move into these vacant properties. A decade on, and this remains just as unlikely. Not only is it estimated that China’s rural to urban migration peaked around 2015, but current UN population projections anticipate that China’s working-age population will fall by 200 million before 2050. Not only are there far fewer people willing to move to these developments, but soon enough there will be far fewer people in China, full stop.
Of course, countless critics have predicted the collapse of the Chinese system for decades, and have been consistently proved wrong. Indeed China’s property prices have continued to skyrocket throughout the COVID-19 crisis. However, even if its housing bubble does not burst so dramatically or soon, the ongoing implications of the current property market for the average Chinese city dweller cannot be underestimated.
In the event of a continuous cycle of property development and soaring prices, Chinese citizens could be set to suffer a sharp decrease in their ability to own property. Despite community income-pooling efforts, it already takes forty years for those on an average salary to afford mortgages in cities such as Beijing, Shanghai and Shenzhen, especially as down payments of up to 60 percent are routinely demanded of first-time buyers. In the event of a major bust, China’s GDP could suffer a decrease of up to 10 percent, which would correspond with prompt global disin- vestment and likely a financial crash. How China manages its property bubble will ultimately be one of the most difficult and defining challenges for its regime in the coming decades, with serious consequences for its population and the international marketplace with which it has become so intermingled.