Housing Inventory in China and Opportunities for Collaboration

The real estate sector has played a crucial role in fostering China’s economic growth since the late 1990s.  Between 1997 and 2014, property investment grew from 4 percent of the gross domestic product to 15 percent.  Housing construction accounted for 15 percent of all fixed asset investment and the same percentage of total urban employment in 2014 (Chivakul et al, 2015).  It is undeniable that any slowing down of real estate investment could have significant impacts on the Chinese economy. 
 
There have been signs of slowing down since the mid-2013.  According to the National Bureau of Statistics of China (2015), the growth rate of real estate investment had slowed from 20 percent in 2013 to 9.2 percent in 2014.  In addition, new housing starts decreased by 14.4 percent in 2014 after experiencing an 11.6-percent growth in 2013.  There is a general consensus among government agencies, researchers, and private developers that China’s real estate market has entered into a slow growth period, which President Xi Jinping called the "New Normal."
 
Among all challenges, the central government is particularly concerned about the oversupply of residential properties in Tier II, III, and IV cities where some unoccupied urban neighborhoods are being labeled as “ghost cities.”  Despite many pessimistic predictions, we see this as an opportunity for key stakeholders such as architects, central and local governments, local communities, real estate developers, and urban planners to get together and rethink policies and practices that can integrate real estate investment with urban development strategies.  Long-term solutions for ghost cities will require all stakeholders to recognize their interdependency.  Central and local governments and planners need to devise urbanization strategies that add value to urban neighborhoods and economies to attract would-be residents.  Real estate developers need to appreciate the guidelines provided by the architectural and planning professionals and to facilitate their implementation to balance public and private interests during rapid urbanization.   
 
The Growing Divide Between Cities

Figure 1 depicts estimated housing inventory ratios across China; the excess supplies are largely located in Tier III and IV cities.  Tier I cities such as Beijing, Shanghai, Guangzhou, and Shenzhen do not seem to be affected by this problem.  In fact recent figures indicate that real estate prices continue to rise in these cities, especially in Shenzhen where new home prices rose by 44.3 percent in the first eight months of 2015 (Chiang 2015). 

Figure 1. Residential Property Inventory Ratio by Tiers

Source: Data are from Chivakul, Mali, W. Raphael Lam, Xiaoguang Liu, Wojciech Maliszewski, and Alfred Schipke. 2015.  Understanding Residential Real Estate in China. IMF Working Paper/15/84.
 
Notes:  (1) Inventory ratio is measured as floor space unsold divided by floor space sold.
            (2) Tier I cities include Beijing, Shanghai, Guangzhou, and Shenzhen.  Tier II cities include Beihai, Changchun, Changsha, Chengdu, Chongqing, Dalian, Fuzhou, Guiyang, Haikou, Hangzhou, Harbin, Hefei, Huhhot, Jinan, Kunming, Lanzhou, Nanchang, Nanjing, Nanning, Ningbo, Qingdao, Sanya, Shenyang, Shijiazhuang, Suzhou, Taiyuan, Tianjin, Urumqi, Wenzhou, Wuhan, Wuxi, Xiamen, Xi'an, Yinchuan, and Zhengzhou.  Other small-and medium-size cities are grouped into Tier III or Tier IV cities.

Surplus inventory in Tier II cities does not appear to be an insurmountable problem, either.  As illustrated in Figure 1, for every square meter of floor space sold, 1.3 square meter will be added to the inventory.  According to the World Bank (2015), the official urbanization rate in China is 54 percent.  Hence, as urban expansion of existing centers extends to Tier II cities, housing inventory will gradually be reduced due to purchases carried out by new urbanites.
 
The major problem concentrates in Tier III and Tier IV cities.  Figure 1 shows that the 2013 housing inventory ratio for Tier III or Tier IV cities was 2.8, whereas the ratios for Tier I and Tier II cities were 0.75 and 1.3, respectively.  Distortions make the property market in these cities susceptible to overbuilding.  On the supply side, some local governments rely on revenue from leasing public land to finance public spending.  They might have promoted building activities even when there was no sign of actual demand.  On the demand side, housing is also treated as an investment vehicle because of the lack of alternative options.  In some cases, investment demand might have inflated the actual demand for housing, leading to oversupply of high-end products that do not match the purchasing power of local residents.
 
Potential Policy Directives
 
The central government has announced some tentative policy directives to deal with the oversupply of housing including:  
    1    reform the household registration system (especially to allow farmers to purchase urban dwellings);
    2    lower the down-payment requirement for mortgage loans for first-time homebuyers;
    3    give mortgage interest subsidies to low-income buyers;
    4    restrict some local governments in Tier III and Tier IV cities from leasing additional public land;
    5    delay the collection of the proposed new property tax; and
    6    purchase selected vacant properties by the government and rent them to low-income households as social housing.  

Although these proposed policies could in principle help align housing demand to supply, they do not resolve two fundamental issues.  First, as showed in Figure 1, different types of cities are facing vastly different situations.  Hence any all-inclusive policy designed to apply to all cities will be inappropriate.  For instance, a demand-boosting policy may work for Tier III and Tier IV cities to get rid of excess housing inventory; yet the same policy may generate demand pressure on the real estate market in Tier I cities where supply is just about catching up with demand.  There is no guarantee that any credit-easing policy will direct investment capital to Tier III and Tier IV cities where economic and/or physical conditions are not attractive to private investment.  This issue leads to the second fundamental problem, that is, how to turn these ghost cities into livable neighborhoods where future homebuyers will be willing to locate their families to and can also find stable and well-paid employment. 
 
We believe that the second issue is where cooperation between real estate developers and planners is much needed. Taking Ordos as an example—the most infamous ghost city in China that is only an hour flight from Beijing—the city government undertook massive, large-scale infrastructure investment in early 2000s in anticipation of a rapid urbanization triggered by industrial development.  Owing to an unexpected drop in coal prices in 2010, the anticipated industrial growth did not materialize, leaving Ordos’s public and private fixed asset investment either underutilized or unoccupied.
 
The city alone cannot get rid of its oversupply of commercial and residential properties because it is facing fiscal crunches and carrying heavy debits.  More importantly it does not know what alternative industries could be promoted to attract private investment back to Ordos.  Everyday public officials and private citizens are watching their investment depreciated, with no interested parties attempting to make use of these resources.  Private investors are unwilling to invest in Ordos because the uncertainty of the city’s future economic development is so huge that they cannot find ways to assess the risks.
 
In fact, Ordos’ situation represents a scenario from which all parties could benefit by cooperating with each other.  On one hand, private investors could profit dearly from existing infrastructure and property investment so long as they could help the city formulate some reasonable short-term and long-term industrial development strategies.  These plans would allow investors to measure the risks involved in investing their capital in Ordos.   On the other hand, if the government could find alternative paths of industrial development and gain the financial support from the private sector, it could avoid wasting the idle resources and may turn the city into a future home for many new urban dwellers.
 
An Opportunity for the STL Lab
 
Certainly fostering collaborations between real estate developers and planners in China is not problem-free.  There are philosophical differences regarding the causes of the oversupply of housing, and thereby both sides have proposed dissimilar solutions.  More importantly, the greatest difficulty involves the negotiation of the distribution of financial benefits generated by the cooperation among different parties.  This is a complex issue that can only be dealt with on a case-by-case basis and cannot be fully  elaborated on in such a short article.  Nevertheless, we like to emphasize that the STL Lab is in a very strategic position to create a platform through which stakeholders with different perspectives and interests could be brought together to have quality discourses about potential solutions for ghost cities.  We are very fortunate to have the intellectual capacity supported by MIT faculty and financial resources to maintain our impartiality, both of which will become major assets for us to mediate conflicts arising from the allocation of development benefits.  We will continue to work hard to play our role in fostering socially responsible real estate development in China.      
 
References
Chiang, Langi.  2015.  “Shenzhen new home prices surge 66pc in August as sales volumes slow.”  South China Morning Post, Wednesday, 23 September, 2015.
Chivakul, Mali, W. Raphael Lam, Xiaoguang Liu, Wojciech Maliszewski, and Alfred Schipke.  2015.  Understanding Residential Real Estate in China. IMF Working Paper/15/84.
National Bureau of Statistics of China.  2015.  Investment in Real Estate Development.
World Bank.  2015.  Data:  Urban Population (% of Total) http://data.worldbank.org/indicator/SP.URB.TOTL.IN.ZS