Impact of housing reform on first-time homebuyers in Guangzhou

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Impact of housing reform on first-time homebuyers in Guangzhou Powered By Docstoc
					Financing home purchase for
first-time buyers in Guangzhou
and Zhuhai: a tale of two Chinese
 Peter Li
 Faculty of Architecture, Design and
 University of Sydney
 December 2007
 Two men meet in Heaven, one from China, one
  from America. The Chinese man says, “Yesterday,
  I finally accumulated enough money to buy a
  house, and the American says, “Yesterday, I
  finally paid off the mortgage on the house I
  bought 20 years ago.” (Business Beijing Online,
 Do people in an old city finance their first home
  differently from people in a new city?
 Let us look at the case of Guangzhou and Zhuhai
  in south China.
 The financial and
  property markets in
  China are becoming
 As more avenues of
  housing finance are
  available, more and
  more people are
  expected to rely on
  mortgage loan from          Mortgage broker,
  the newly minted            Zhuhai
  financial institutions in
  major Chinese cities.
 Aims
 1. Based on initial findings of 500 interviews of
  first time home buyers in Guangzhou and Zhuhai
  in 2006, the study gives an idea of the number of
  respondents who bought their homes outright
  without resort to mortgage facilities of any kind.
 2. This paper aims to find out their means of
  fulfilling the homeownership dream in China.
 (1) The interview findings suggest
  assistance from relatives and friends were
  sought in order to climb up the housing
 (2) The objectives are to explore the other
  sources of funds for first-time homebuyers
  in Guangzhou and Zhuhai, such as part-time
  jobs and life savings, in addition to family
1.2 Literature Review
 (Li and Yi, 2007) on housing finance in
  China was a good starting point.
 Apart from that, little is known about the
  sources of finance for first home buyers
  (FHB) in China, which forms the focus of
  this paper.
1.2.1 Review of Previous Studies
 Previous studies on Chinese housing dwell
  mainly on housing policies (Lee 2000;
  Wang and Murie 1999; Wu 2001), housing
  provisions (Tolley 1991; Wu 1996),
  housing problems (Chiu, 1996a; Chiu
  1996b; the World Bank 1992; Zhou and
  Logan 1996; Shaw 1997; Wang and Murie
  2000) reform & housing preferences (Li,
  2003; Wang & Li, 2006).
1.2.2 Limitation of Previous
 Little has been extended to studying the avenues
  of housing finance particularly for FHB in the
  post-Deng period.
 Hence, the focus of this paper will be on the
  means of acquiring homeownership for FHB in
  Guangzhou and Zhuhai.
 Sale of public housing at greatly reduced prices in
  the 1990s told part of the story. Housing reform
  flats were also sold at incredibly low prices for
  sitting tenants .
2. The Analytical Framework
 Over the last two decades, housing in socialist
  China was characterized by the welfare nature of
  housing provision system. To rid the state of the
  housing burden, there has been a gradual change
  from ‘work unit’ housing to a free market for
  housing where people can now choose to buy or
  rent a house or an apartment.
 The transition from state-owned housing to private
  homeownership signaled not only a change from a
  planned economy to a market economy (Li, 2003),
  but it also represented a transitional stage of
  housing opportunities unique to mainland China.
2.1 The Demand Side of
Affordable Housing
 The ultimate goal of housing reform was
  commercialization of housing. Low income
  appeared to be a great stumbling block to
  increasing the effective demand for housing
 In the wake of the Asian financial crisis in 1997,
  the government decided to expand housing
  construction and to increase the effective demand
  for housing by putting an end to welfare
  distribution of housing. In other words, work
  units or state-owned enterprises would no longer
  construct, purchase and distribute housing to staff.
  and workers.
2.2 The Supply Side of
Affordable Housing
 After Deng Xiao ping’s inspection of southern China, the
  idea of a ‘socialist market economy with Chinese
  characteristics’ emerged and the Chinese economy took off.
  However, speculation resulted in bubbles in the real estate
  market, especially in the coastal cities. The supply of
  luxury apartments and villas far exceeded demand.
 The housing industry has become one of the main driving
  forces of the economy of modern China. Steady economic
  growth, housing reforms, the second-hand housing market,
  higher income and higher costs of building have
  contributed to rising house prices. As house prices
  escalate, housing will become unaffordable to homebuyers.
2.3 Data and Methodology
 The present study was conducted with a random sample of
  about 500 FHB in Guangzhou and Zhuhai. The data were
  gathered through in-depth interviews.
 Other data-gathering methods such as a mailed
  questionnaire would not allow for clarification or
  discussion of the topic or issue from interviewees’
  perspective. Similarly, online questionnaire survey as
  suggested by one of the interviewees in Guangzhou would
  not allow the researcher to explore deeply what the
  homebuyer felt about a given issue.
2.3 Data and Methodology
 The interviews were conducted in private
  without the assistance of state or local
  officials. Confidentiality of the subjects
  was assured and privacy of the interviewees
 Methodology: In-depth interviews for a
  random sample of first-time homebuyers in
  Guangzhou and Zhuhai, China.
Data and Methodology
 Academics at Zhongshan University in
  Guangzhou (which happened to have a campus in
  Zhuhai for freshmen and sophomores) provided
  information on the districts, such as Punyu in
  Guangzhou and Gongbei in Zhuhai, to conduct the
  in-depth interviews by random sampling.
 After the field work in 2006, 500 in-depth
  interviews were made which translated into x
  pages of single-spaced 12 point type interview
  transcriptions and notes.
Gongbei check-point, Zhuhai
Data and Methodology
 The interviews were transcribed by hand
  and then typed into a computer file.
 The quantitative data gathered from the
  random sample would be analyzed using
  SPSS, supplemented by the words of the
  interviewees for better understanding and
  interpretations of the findings.
Housing affordability in
Guangzhou & Zhuhai
3.1Housing affordability has attracted much
  attention in China recently. With real incomes
  lagging behind increases in house prices, urban
  housing has become less affordable for Chinese
 Housing affordability can be defined as the ratio
  between household income available for housing
  payments and the required payment (instead of the
  full price) for the housing unit (World Bank,
Housing affordability in
Guangzhou and Zhuhai
3.2 Concepts related to housing affordability
 The House Price to Income (HPI) Ratio
 The HPI Ratio is a good indicator of the
  affordability of medium housing prices to middle-
  income families. For developed countries, it is
  from 1.8 to 5.5 whereas for developing countries,
  from 4 to 6. When the HPI Ratio falls between 3
  and 6, house prices are generally affordable
  (Zhongguo fangdichan 2002).
Table 1: House Price to Income Ratio of Chinese urban
               households, 1991 – 2005
  Year       Average         Selling        Per capita     Size of        Annual      House
             selling         price of a     annual         households     household   Price
             price of        80m2           income of                     income      Income
             commodity       commodity      urban                         (Yuan)      Ratio
             housing         housing        households
             (Yuan /m2)      unit           (Yuan)

  1991       756              60480         1700.6         3.43            5833.1     10.4
  1992       996              79680         2026.6         3.37            6829.6     11.7
  1993       1208             96640         2577.4         3.31            8531.2     11.3
  1994       1194             95520         3496.2         3.28           11467.5      8.3
  1995       1509            120720         4283.3         3.23           13835.1      8.7
  1996       1605            128400         4838.9         3.20           15484.5      8.3
  1997       1790            143200         5160.3         3.19           16461.4      8.7
  1998       1854            148320         5425.1         3.16           17143.3      8.7
  1999       1857            148560         5854.0         3.14           18381.56     8.1
  2000       1948            155840         6280.0         3.13           19656.4      7.9
  2001       2017            161360         6859.6         3.10           21264.76     7.6
  2002       2092            167360         7702.8         3.04           23416.51     7.2
  2003       2197            175760         8472.2         3.01           25501.32     6.9
  2004       2608            208640         9421.6         2.98           28076.0     7.43
  2005       2937            234960         10493.0        2.96           31059.0     7.56

  Source: Compiled by author with data from China Statistical Yearbook 2006
                                                           Guangzhou    Zhuhai

No. of Households (HH) surveyed [by random sampling]             500       100

HH size                                                       1563.56    342.74

No. of employed persons                                        909.46    167.41

Average HH size                                                  3.13      3.43

Average no. of employed persons/HH                               1.82      1.67

No. of persons supported by each employee                        1.55      1.85

Per capita monthly income (Yuan)                              1182.83   1277.32

Disposable income (Yuan)                                      1163.88   1259.17

Per capita monthly income of each employed person (Yuan)      1707.31   1913.13

Per capita monthly expenditures                                1075.6   1155.63

Expenditures for consumption                                   945.79    974.52
Comparison of FHB in
Guangzhou & Zhuhai
I. Socio-economic background
1. Gender
2. Age group
3. Marital status
4. Number of children
5. Staying with parents
6. Staying with grandparents
7. Occupation
8. Part-time job
 26% respondents in Zhuhai stayed with parents , Guangzhou 18%
   (Pilot survey, 2004).
Comparison of FHB in
Guangzhou & Zhuhai
II. Household income
1. Personal income
2. Household income
3. Income from other
    members of the family
    58% respondents in Guangzhou received income support from spouse
    for home purchase, Zhuhai 30% (Pilot survey, 2004)
Comparison of FHB in
Guangzhou & Zhuhai
III. Housing Finance

Source of funding for
home purchase:
1. One-off payment or
   by mortgage
2. Which bank?
3. Mortgage payment as a share of monthly income
4. Amount of down payment
5. Down payment as percentage of purchase price
  Commodity housing, Zhuhai
Comparison of FHB in
Guangzhou & Zhuhai
 IV. Housing Finance
7. Mortgage period
8. Mortgage rate
9. Amount of mortgage as
     % of property price
10. Penalty for late payments
11. Administrative fee for early
12. Home insurance
13. Mortgage payments
                                   Estate agency, Zhuhai
Comparison of FHB in
Guangzhou & Zhuhai
1.   Contribution from other family members on
     down payment
2.   Contribution from other family members on
     mortgage payments
3.   Impact of tax reduction on affordability of FHB
4.   Impact of reduction in land costs on affordability
     of FHB
5.   Impact of down payment subsidies on
     affordability of FHB
6.   Impact of mortgage interest subsidies on
     affordability of FHB
Affordable Housing: the China
approach compared with Hong Kong
approach & policy suggestions
 ‘One country Two systems’- capitalist
  Hong Kong and socialist market economy
  of Mainland China.
 The China approach
 Sky-rocketing house prices get in the way
  of realizing the dream of owning a home by
  most Chinese.
 Housing is not a consumer good to most
  Chinese, but an investment.
Affordable Housing: the China
approach compared with Hong Kong
approach & policy suggestions
 Like health care and education, housing is a quasi-
  public good provided by the government.
 Rapid urbanization and explosion in urban
  population have led to severe shortage of housing
  in many cities.
 For higher returns on investment, there is
  oversupply of luxury flats by developers but
  chronic shortage of affordable housing for low-
  income families.
Affordable Housing: the China
approach compared with Hong Kong
approach & policy suggestions
 The Hong Kong approach
 Public housing programs are mainly administered
  by the Hong Kong Housing Authority (since
  1953), with more than half of the over 7 million
  population now living in public housing estates.
 A non-profit making HK Housing Society was
  also established in 1952 to produce affordable
  housing for the lower income group. It manages
  some 42 estates in the territory.
 Affordable Housing: the China
 approach compared with Hong Kong
 approach & policy suggestions
 In December 2003, 49.6% of the population in HK
  lived in public housing in more than 200 estates
  across the Special Admin. Region.
 The Housing Authority also built flats under the
  Home Ownership Scheme (HOS) for sale to
  eligible families.
 Similarly, subsidized public flats under the
  ‘Tenant Purchase Scheme’ were once sold to
  sitting tenants at very affordable prices but was
  not as popular as HOS due to existing low rents
  and maintenance responsibilities.
Affordable Housing: the China
approach compared with Hong Kong
approach & policy suggestions
 Sale of Home Ownership flats was
  suspended from Nov. 2002 to Jan. 2007,
  lest it was a drag on the property market.
 It was replaced by a Home Assistance Loan
  scheme which provided interest-free loans
  to enable low-income families in Hong
  Kong to buy in the private market.
Affordable Housing: the China
approach compared with Hong Kong
approach & policy suggestions
 Policy suggestions
 Lai (1998) argues that ’more living and floor
  space produced under a property market-led
  regime of housing governance is less likely to
  achieve the social objective of decent and
  affordable housing for the whole nation.’
 To protect the interests of the low-income groups,
  the Chinese government should provide low-rent
  homes as a form of housing security system.
 Affordable Housing: the China
 approach compared with Hong Kong
 approach & policy suggestions
 ‘The present housing reform is only liberalizing
  the property housing market. There is no public
  social housing program to provide for those in
  need. This omission might one day trigger off
  social instability in urban areas’(Lai, 1998).
 Hence, a special body like the HK Housing
  Authority should be set up to implement public
  housing programs in Mainland China.
Good news…Implementation of
Five-pronged Strategy: CEPA
•   Five new banking sector measures were added in CEPA Supplement
    IV :

     (1)Lowering asset requirement for Hong Kong banks to acquire
        shareholdings in Mainland banks from US$10 billion to US$6 billion

     (2)Establishing a fast track for setting up branches in central western and
        north eastern areas and in Guangdong Province of the Mainland

     (3)Encouraging Hong Kong banks to set up banks in rural areas on the

     (4)Providing active support for Mainland banks to set up subsidiaries in
        Hong Kong

     (5)Relaxing criteria for Hong Kong banks to qualify for CEPA
 Source: Hong Kong Monetary Authority, 2007
 6.1 Implications of the Research
 It is interesting to note that the interview
  data suggest more home buyers in
  Guangzhou (58.5%) bought their first home
  by one-off payment than home buyers in
  Zhuhai (42.8%), reflected probably by
  higher income earnings in Guangzhou and
  the new housing allowance scheme there
  from 1998.
6.2 Suggestions for further Research
 As newcomers to the capitalist market, Chinese
  households finance their home purchase
  differently from people buying in a mature
  capitalist market.
 By asking the same interview questions for a
  control group of first-time buyers in Hong Kong,
  the differences in home financing between FHB in
  in Hong Kong and their counterparts in
  Guangzhou & Zhuhai can be found.
Thank you very much!
 Chiu, Rebecca L.H. (1996a) “Housing”, chapter
  14 in Shanghai: Transformation and
  modernization under China’s open policy, Yeung,
  Y.M. and Sung Yun-wing, eds., The Chinese
  University Press, Hong Kong, 341-374.
 Chiu, Rebecca L.H. (1996b) “Housing
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 Lai, On-kwok (1998) “Governance and the
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 Hong Kong Monetary Authority ‘Briefing
 to the Legislative Council Panel on
 Financial Affairs’ 8 November 2007
 Lee, James (2000) ‘From welfare housing to
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 Li, Peter (2003), “Housing reforms in
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 World Bank (1992) China: Implementation
 Options for Urban Housing Reform,
 Washington, D.C.
 Wu, Fulong (1996) “Changes in the structure of
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