Different from the US where property rights are private; in China, individuals cannot own land.
Land ownership belongs to the state; decisions are made by the government.
Individuals purchase land use rights for a period, typically 70 years in urban China.
After 70 years, the land use right does not belong to the purchaser anymore.
Main difference from the US is in the taxation system.
In the US, landlords pay property tax to local government annually, which is a major fiscal income for public expenditures.
In China, homeowners do not pay property tax annually.
Government fiscal income comes from:
Land sales revenue.
High tax rates during property transactions (sometimes as high as 10% of the transaction value).
Local Government Finances
Local governments can attract companies or factories to produce in their region, which generates tax income.
Selling cheap industrial land attracts businesses but can lead to high housing prices.
High housing prices can make housing unaffordable for many households, even compared to major US cities like Los Angeles.
Local governments heavily rely on land sales for income and lack sustainable income sources like property tax.
Housing Market Structure
Private Sector:
New residential properties developed by private companies and sold to end-users (households).
Secondhand market: Sales of existing properties to households.
Rental housing market: Landlords directly rent properties to individual renters.
Landlords lease properties to institutions/private companies who then divide the lease into short-term contracts for renters.
Public Sector:
Government builds public housing and sells or rents it to eligible households.
Eligibility:
Household income cannot be too high.
Some cities offer rental housing subsidies to attract talent, even with high incomes.
Unique Aspects of Chinese Housing Market
Location Preference: Unlike the US, city centers are preferred over suburbs due to densely populated urban spaces.
Commuting: Commuting from suburban areas to city centers can take over an hour in cities like Shanghai.
Rent Distribution: Higher rents are found in city centers.
Shared Housing: Multiple bedrooms in one apartment are rented to individual, often unacquainted, college graduates.
Density of public resources:
Universities, hospitals, primary and middle schools are clustered around the city center.
Restaurants and entertainment facilities are also densely located around the city center.
Reasons for Purchasing Houses
Providing children with quality education:
Households purchase homes in school catchment zones to secure enrollment in top primary schools.
Competition for school placement is converted into housing market competition.
Housing units within school catchment zones can be significantly more expensive.
For instance, purchasing a unit within the catchment zone of highly ranked primary school may cost 10,000,000 RMB more than a similar unit just outside the zone.
Marriage: Couples usually purchase their first home before getting married, with the groom paying a larger percentage.
Due to a disproportionate gender distribution (more marriageable males), competition is converted into the housing market.
Sales of New Housing Units
Presale System: Developers sell housing units before they are built, providing only a contract.
Buyers pay a significant amount (e.g., $1,500,000) and may have to wait one to two years to receive the property.
Buyers often borrow a mortgage from the bank, paying a percentage (e.g., 30%) while the bank pays the remaining 70%.
Risk during market downturns: Developers may lack the cash flow to finish construction.
Government intervention: State-owned enterprises may take over unfinished projects from bankrupt developers.
Sales of Existing Homes
Unique Brokerage Market: Concentrated brokerage market, especially in Beijing and Shanghai.
One company may have over 50% market share in Beijing and over 20% in Shanghai.
Dominant companies offer free listing services, attracting a large number of sellers (over 90%).
These company provide services such as VR models of the properties for free.
Commission is only paid if the property is successfully sold.
Monopoly concerns: The dominant company controls information and may manipulate pricing signals.
High tax rates for transactions:
VAT (Value Added Tax): More than 5% of the capital gain of the seller (or total value if sold within two years of purchase).
Commission Fee: 2-3%.
Income tax: 1-2%.
Restrictions and policies:
Housing purchase and sales restrictions implemented to stabilize the market.
Examples: purchase restrictions based on hukou (household registration) or years of work in the city.