Strong growth in China’s housing markets

Boosted by direct government intervention, housing sales and property prices in China rose in the first half of 2009, in a quick recovery from price falls of early 2008.

House prices in 70 major cities rose by 2% (3.2% in real terms) in August 2009 from a year earlier, the third month of house price increases, according to data from the National Bureau of Statistics of China (NBSC).

However according to other sources, demand for residential properties was already rising rapidly by March 2009.  In that month housing sales were up by 36% on a year earlier, according to the Union Bank of Switzerland (UBS).

Residential property prices in China had soared in 2007, prompting fears that a property bubble was forming. The government implemented measures to deflate the bubble. Tighter housing policies included new property taxes and tighter lending conditions. After allowing foreigners to freely own properties in 2001 (2002 in Beijing), the government restricted ownership to resident foreigners who have worked, studied or lived in China for at least a year. The property can only be used for personal purposes and not for rental.

These measures led a slowdown of house price rises in the first half of 2008, and combined with the global financial crisis, caused house prices to fall in the second half of 2008.

According to the China Real Estate Index System (CRIES):


  • Residential property prices in Beijing slid by 2% (3.2% in real terms) in 2008.
  • Shanghai house prices stagnated in this period in real terms. In nominal terms, prices rose by 2%.

Tight government policies reversed

In response to the global crisis, the government largely reversed its previous tight housing policies:


  • The government announced a CNY4 trillion (US$585 billion) stimulus package in November 2008, with allocations for housing and infrastructure projects, manufacturing, education, and industry.
  • Local governments were allowed to issue CNY200 (US$27.6) billion in bonds, through the Ministry of Finance.
  • The property deed tax rate for first-time home buyers was reduced to 1% from 1.5% from January 2009 to December 2009, if the area of the residential property bought is less than 90 sq. m.
  • Stamp duty and land value-added tax was waived for individuals purchasing residential properties from January 2009 to December 2009.
  • If residential property is held for more than two years, the seller is exempted from the 5.5% business tax. 

The residential property market responded quickly to these stimulus measures. Property prices in Shanghai increased by 19% from March 2009 to July 2009, according to China Daily.  Buyers took advantage of looser lending conditions and lower interest rates. Developers were able to easily acquire loans with the lowered capital requirements.

China’s residential property prices are expected to continue rising for the rest of 2009 and 2010, according to Colliers International, an international real estate firm.

Housing Provident Funds boost demand

There a large pool of buyers because of the Housing Provident Funds (HPF), which since their introduction in 1998 have encouraged workers to save a portion of their income for residential property purchases.

When an employee registers for an HPF, his employer opens a special account for him in a state-owned bank. The employee must contribute 5% of his monthly salary, which is matched by the employer. The employee cannot withdraw unless he retires, dies, or moves company, and can only use the funds to purchase residential property, for which he is entitled to below market-rate loans from state-owned banks.

An estimated 80 million workers were in the program by 2004, and had saved CNY630 billion (US$76 billion).  Government employees and employees of state-owned enterprises are required to take part, but HPFs are voluntary for private firms’ employees.

Shanghai: good times ahead

Shanghai, China’s largest city with a population of more than 20 million, will host the 2010 World Expo, one of the world’s biggest events in terms of economic and cultural impact. This has meant the construction and improvement of much city infrastructure to accommodate around 70 million visitors for six months.

Demand for residential properties is expected to grow due to the influx of participants and organizers, according to Colliers International.  Prices in Shanghai secondary housing market already have risen by a monthly average of 1.1% (0.7% in real terms) from March 2009 to July 2009, according to data from ehomeday, Shanghai’s largest housing information portal.

Beijing recovers from its Olympic hang-over

Beijing, China’s administrative capital, is home to more than 17 million, and hosts 26 of the Fortune Global 500 companies.

From January 2009 to June 2009 average Beijing transaction prices increased 27% (26.5% in real terms) to CNY13,302 per sq. m., according to Beijing Real Estate Transaction Management Center.  Buyers who delayed purchasing in H2 2008 have rushed to take advantage of price drops and the relaxed housing policies, leading to a 147% surge in residential pre-sales in H1 2009, compared to the previous year.

This is a dramatic reversal of the previous situation of oversupply. Residential property prices in Beijing had dropped after the Beijing Summer Olympics, according to Knight Frank. Property prices continue to fall due to the global credit crunch, with multinational corporations holding back on expansion projects.

With barely any new housing supply in H1 2009, all Beijing’s excess supply from 2008 has now been sold.

Mortgage market growth is surging

Outstanding home loan volumes surged 29.5% in H1 2009 to CNY3.86 trillion (US$565 billion) after lending rules were relaxed by the People’s Bank of China (PBOC). Banks were very eager to lend, with some offering discounts on mortgage rates for first-time buyers.

The strength of the mortgage market was in sharp contrast to the conditions in 2008, when outstanding home loans fell 1.7%, due to the tighter lending rules.

Nevertheless China’s mortgage market remains small, with home mortgage loans less than 10% of GDP. Mortgage lending is still dominated by state-owned commercial banks.

The secondary mortgage market remains undeveloped. A mismatch between property registration and mortgage policies exists. Banks put the burden on real estate developers when buyers default on loans.

Lending conditions are easy

In response to the slower economic growth in 2008, the down-payment for mortgages of first-time buyers was lowered to 20%, and the floor interest rates for home loans was lowered to 70% of the benchmark lending rate.

Home loan rates, which are based on the benchmark rate, have dropped since the PBOC reduced its benchmark lending to 5.31% in December 2008, its fifth interest rate cut since September 2008.  The interest rate for HDF loans fell to 3.87% in December 2008, and by June 2009, the weighted average interest rates of home loans was 4.34%.

Construction activity is rapidly increasing

Ironically, developers were initially slow to respond to the surge in demand that began as early as March 2009, even though in September 2008 the government reduced the minimum capital requirements for housing developments to 20%, from 35%.

Developers are now taking advantage of the government’s stimulus to access funds through state-owned banks. With easy access to funding, the purchase of residential plots in Beijing increased by 52.4% from H2 2008 to H1 2009.

Rental yields are low

The rental market in China is heavily regulated, and the system favours the landlord. The landlord is assured of large payments for any breach of contract committed by the tenant. Although major cities have no rent controls, smaller cities may have rent controls that are remnants of the Cultural Revolution.

In February 2009, the average rental yield in major Chinese cities was 4.42%, according to Global Property Guide research.


  • Guangzhou and Shenzhen have the highest yields, with average returns reaching 5.41% and 5.69%, respectively.
  • Yields in Beijing, Chengdu and Shanghai are poor, with average yields of 4.21%, 3.88% and 3.74%, respectively.

Rents are being pressured downwards. Government fiscal moves have encouraged individuals to buy, not rent. Many foreign companies affected by the global credit crunch have cut residential rental spending. As a result, vacancy rates in luxury residential properties in Shanghai rose to 24.2% in Q2 2009, and in Beijing the luxury residential vacancy rate remains high, at 30.2%, according to Colliers International.

Since 2001, the government has provided low-income rental housing to China’s lowest-income groups. As part of the recent measures, the government has allocated CNY13 billion (US$1.9 billion) to fund construction of low-rent residential units, according to Global Times. Average rents are expected to fall with the introduction of these low-rent properties.

The world’s fastest growing economy

China is the world’s fastest growing economy, with 10.2% average annual GDP growth from 2002 to 2006, including a bumper 13% growth in 2007. However, growth slowed significantly in 2008 to 9%, after the government’s monetary tightening. The economy is expected to expand by 7.5% in 2009, according to the IMF.

Growth in Chinese exports slowed to 17% in 2008, after increasing 25% in 2007, according to NBSC. With domestic demand waning, import growth slowed to 18% in 2008.

To support exports - the economy’s main engine of growth - the government has slowed the rise of the Yuan since July 2008.  It has been relatively unchanged at CNY6.83 per dollar. China’s foreign exchange reserves rose by 18.7% to US$2.13 trillion in the year to June 2009.

Significantly boosted by the stimulus package, the economy is expected to continue its rapid growth. This will help strengthen the housing market further.