Transcript Impact of housing reform on first

Financing home purchase for
first-time buyers in Guangzhou
and Zhuhai: a tale of two Chinese
cities
 Peter Li
 Faculty of Architecture, Design and
Planning
 University of Sydney
 December 2007
Background
 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, 2000).
 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.
Background
 The financial and
property markets in
China are becoming
internationalized.
 As more avenues of
housing finance are
available, more and
more people are
expected to rely on
mortgage loan from
the newly minted
financial institutions in
major Chinese cities.
Mortgage broker,
Zhuhai
Introduction
 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.
Objectives
 (1) The interview findings suggest
assistance from relatives and friends were
sought in order to climb up the housing
ladder.
 (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
assistance.
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
Studies
 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
consumption.
 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
respected.
 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
households.
 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, 1992).
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 middleincome 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
price of
commodity
housing
(Yuan /m2)
Selling
price of a
80m2
commodity
housing
unit
Per capita
annual
income of
urban
households
(Yuan)
Size of
households
Annual
household
income
(Yuan)
House
Price
Income
Ratio
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
756
996
1208
1194
1509
1605
1790
1854
1857
1948
2017
2092
2197
2608
2937
60480
79680
96640
95520
120720
128400
143200
148320
148560
155840
161360
167360
175760
208640
234960
1700.6
2026.6
2577.4
3496.2
4283.3
4838.9
5160.3
5425.1
5854.0
6280.0
6859.6
7702.8
8472.2
9421.6
10493.0
3.43
3.37
3.31
3.28
3.23
3.20
3.19
3.16
3.14
3.13
3.10
3.04
3.01
2.98
2.96
5833.1
6829.6
8531.2
11467.5
13835.1
15484.5
16461.4
17143.3
18381.56
19656.4
21264.76
23416.51
25501.32
28076.0
31059.0
10.4
11.7
11.3
8.3
8.7
8.3
8.7
8.7
8.1
7.9
7.6
7.2
6.9
7.43
7.56
Source: Compiled by author with data from China Statistical Yearbook 2006
Guangzhou
Zhuhai
500
100
1563.56
342.74
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
No. of Households (HH) surveyed [by random sampling]
HH size
No. of employed persons
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
re-payments
12. Home insurance
13. Mortgage payments
Estate agency, Zhuhai
Comparison of FHB in
Guangzhou & Zhuhai
1.
2.
3.
4.
5.
6.
Contribution from other family members on
down payment
Contribution from other family members on
mortgage payments
Impact of tax reduction on affordability of FHB
Impact of reduction in land costs on affordability
of FHB
Impact of down payment subsidies on
affordability of FHB
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 lowincome 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
Mainland
(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
Conclusions
 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.
Conclusions
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!
References
 Chiu, Rebecca L.H. (1996a) “Housing”, chapter
14 in Shanghai: Transformation and
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Y.M. and Sung Yun-wing, eds., The Chinese
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