Home / UCLA Housing Voice Podcast / Episode 71: How China Created a Housing Market with Lan Deng

Episode 71: How China Created a Housing Market with Lan Deng

Deng and Chen, Market development, state intervention, and the dynamics of new housing investment in China

More

Episode Summary: Each year, more money is invested in China's housing market than any other. Lan Deng shares how the market was shaped and the heavy role the government still plays, and what housing in China looks like today.

  • “With the largest housing market in the world, China sees the largest housing investment. This can be seen by comparing China and the United States, the world’s two largest economies. In 2014, new housing investment in China amounted to 6.4 trillion yuan, twice as much as in the United States; since 2010, housing investment in China accounted for about 9 to 10% of the nation’s gross domestic product (GDP), three times as much as its counterpart in the United States (Joint Center for Housing Studies of Harvard University, 2016; National Bureau of Statistics of China [NBSC], 2016).” 
  • “In China, decades of housing reform and economic growth have significantly improved the country’s living conditions. At the same time, housing prices have risen to a level beyond the reach of many urban households. Nationwide, the average residential sales price has tripled since 1999, rising from 1,857 yuan per square meter in 1999 to 5,850 yuan per square meter in 2013 (NBSC, 2014). In Beijing, the average price for a unit of 100 square meters was about 17 times as much as the average family income in 2013. In 12 of the 35 major Chinese cities, the same ratio of housing price to family income exceeded 10 in 2013 (NBSC, 2014).”
  • “To understand what has driven up housing prices in China, one needs to measure the price elasticity of housing investment, which captures how new housing production has responded to housing price changes. If housing production is price elastic, housing price would reflect mainly the production cost; any increase in housing demand would be translated primarily into an expansion in housing production rather than an increase in housing prices. Thus, the rising housing price in China would be due to rising production costs such as the cost of land. By contrast, if new housing production is price inelastic, an increase in housing demand, whether rational or irrational, will drive up housing prices because supply cannot catch up with demand.”
  • “After decades of reform to enable private housing markets and build market economies, how might we expect China’s housing supply system to behave? In the United Staes, a country with a well-developed market economy that is also large and diverse as China, studies have repeatedly shown that new housing production is price elastic, which sets the tone for the nation’s housing policy (Green & Malpezzi, 2003).2 Does China now behave similar to the United States?”
  • “Compared to the United States and other market economies, China has some unique institutional arrangements that affect how housing is produced. First, the Chinese state owns all urban land. As representatives of the state, local governments control the supply of land for urban housing development. Second, though the Chinese government has shifted the major responsibility of housing provision from the public sector to the private sector, it has not relinquished its control over the housing industry. In 2003, the Chinese State Council officially identified the real estate industry as a key growth engine for the country’s economy (Chen & Han, 2014). As part of its macroeconomic management strategies, the Chinese central government frequently issued policies to rein in housing price growth when the market appeared to be overheated, while taking every possible action to boost it when the market slumped into recession (L. Deng, Shen, & Wang, 2011). The state ownership of land and its forceful interventions into the housing industry have had major impacts on the dynamics of housing investment in China. Yet few studies have examined how these factors have affected the responsiveness of housing investment to housing price changes. This article attempts to fill this gap.”
  • “We collect housing market data for 35 major Chinese cities from 1999 to 2013, a period during which private housing markets flourished in China. A major housing reform in 1998 finally banned work units from allocating free housing to their employees. Since then, urban households have had to purchase housing from the private market, which has fostered the development of a private housing industry. To determine how the housing supply system has evolved during this period, this study develops econometric models to examine how new housing investment has responded to changes in housing prices and the prices of development inputs, such as land, labor, and capital.”
  • “One important issue it will consider is how the dynamics of new housing investment have been shaped by both the development of the private market and state intervention. As Naughton (2017) argues, in addition to enabling the market economy, the period since 1999 has also been a time when the Chinese government has become unusually large, powerful, and intrusive, with both the capacity and the intention to intervene in the economy whenever it is needed. One extraordinary example is the Chinese government’s responses to the global financial crisis in 2008, when housing prices dropped for the first time across the country. In a swift response, the Chinese government pumped 4 trillion yuan into the economy to boost growth, most of which ended up flowing into the real estate sector (Y. Deng, Morck, Wu, & Yeung, 2015).”
  • “Moreover, because China is a very large country, the degree of market development and the impacts of state intervention on housing development are also likely to vary from place to place. Thus, in addition to examining the temporal variation in the dynamics of housing investment shaped by the state’s macroeconomic policies, this study considers the spatial variations; that is, how regional differences in economic development and resource endowment have affected the housing supply system.”
  • “The for-profit housing development industry started in the mid-1980s and has grown rapidly due to the reforms in many economic sectors. Reform in the finance sector has opened access to bank credit. The introduction of market mechanisms in resource allocation allowed developers to freely purchase construction materials. Labor supply is also easily available due to reduced constraints on regional population migration. Last but not the least is the reform of land markets. Due to the separation between land ownership and land use rights, developers can purchase land use rights from local governments. They can also transfer land use rights on the secondary market.”
  • “In a study of the housing market reforms in Eastern European nations and the former Soviet Union, Dowall (1992) argues that a housing supply system can best respond to consumer demand when housing developers are small, diversified, and flexible … It is also important to know whether the markets for development inputs are competitive (Green & Malpezzi, 2003). The supply of developable land is often a concern, given that government regulations may restrict the competitive allocation of land. In a study of U.S.  metropolitan areas, Mayer and Somerville (2000) find that in areas with more extensive land use regulations, the price elasticities of new housing supply are over 20% lower than those in less regulated markets. Cross-national studies also report similar findings … To summarize, existing studies have identified two factors that are most important in affecting a nation’s housing supply system: the nature of the development industry and the availability of land.”
  • “From 1999 to 2013, China’s housing development industry experienced explosive growth. In 1999, there were only about 25,000 development firms employing fewer than 1 million workers. By 2013, the number of development firms had tripled to over 90,000, employing over 2.5 million workers. With the growth of the development industry, residential development has become a key driver of China’s economic growth. Figure 1 shows the growth of China’s housing investment and its contribution to GDP. In 1999, housing investment was only about 264 billion yuan and accounted for 2.9% of the nation’s GDP. By 2015, investment in this sector had reached 6.45 trillion yuan and accounted for about 10% of the nation’s GDP (NBSC, 2016).”
  • “As the industry expanded, its ownership structure also experienced fundamental transformation. Figure 2 traces the growth of three types of development firms: firms that are state or collectively owned, firms owned by domestic private investors, and firms owned by foreign investors. As Figure 2 shows, the industry’s expansion was driven by the growth of firms owned by domestic private investors, which increased from less than 10,000 in 1999 to over 84,000 in 2013. Today, such firms account for over 90% of China’s development companies. In contrast, the number of state- or collectively owned firms declined significantly, dropping from about 11,000 in 1999 to a little over 2,000 in 2013, less than 3% of the total development firms. Figure 2 also shows a small number of firms owned by foreign investors throughout the study period.”   
  • “With the dramatic increases in development firms and changes in ownership structure, has housing development become competitive in China? Table 1 provides further evidence on this by reporting the share of housing investment made by four types of development firms, classified by their capital capacity and development experience. Firms in the first-grade category, for example, are the largest and most experienced, with registered capital of over 50 million yuan and development experience longer than 5 years. As Table 1 shows, though the number of first-grade firms grew over time, collectively they accounted for only a small share of the country’s housing investment, less than 4% in 2014. In fact, both the first- and second-grade development firms, the two groups of large developers, saw their investment share decline during the study period. Most of the housing investment is now made by a large number of small firms, which indicates that the development industry became more competitive during our study period.”
  • “According to the Chinese constitution, all urban land belongs to the state, and all rural land is owned by the rural collectives. Local governments are the representatives of the state and are in charge of expropriating rural land for urban uses. In 1988, China amended its constitution to separate land ownership from land use rights. Since then, developers who wish to pursue real estate developments can pay a land conveyance fee to lease land use rights from local governments (Lin, 2010). Still, because local governments are the only providers of the new land supply, the land market in China is not competitive.”
  • “The monopolistic control of the land supply by local governments does not mean that housing developments in China might face land constraints. This is because local governments in China are not just distant regulators. As de facto land owners, they are also actively involved in local real estate development activities (Cartier, 2001; Lin, 2010). Local governments often acquire rural land at low cost but sell it for a much higher conveyance fee. As a result, chasing the lucrative profits from land sales has become popular among local governments. This fiscal incentive is further exacerbated by the fact that China’s tax-sharing reform of 1994 has deprived local governments of their major sources of revenue. As one of the few local revenue sources that do not have to be shared with the central government, land conveyance fees have become a critical  resource for local governments to finance infrastructure development and promote economic growth (Lin, 2010). For many local government officials, promoting real estate development is also politically attractive, given that their career advancement is tied to local economic performance, especially GDP growth (Lichtenberg & Ding, 2009; Naughton, 2017).”
  • “The competitive nature of the housing development industry and the strong incentives for local governments to supply land for urban development suggest that housing supply in China has become responsive to demand. However, unlike the United States or other market economies where the state often functions as a distant regulator, the Chinese state remains as a prominent player in the economy and is deeply involved with real estate development, which has had major impacts on the housing industry. As Figure 1 shows, despite the continuous expansion, housing investment has not grown at constant speed. Instead, there were ups and downs in the growth of housing investment, with increasing volatility since 2008. Examining the three figures together shows that we can identify approximately four phases during the study period—1999 to 2003, 2004 to 2008, 2009 to 2011, and 2012 to 2013—with each phase experiencing different levels of fluctuations. These fluctuations were not just the result of the expansion and contraction of the Chinese economy; they were also shaped by different state policies enacted in each phase.”
  • “The first phase, 1999 to 2003, marked the beginning of China’s private housing industry as the country terminated its welfare housing system in 1998 (Chen & Han, 2014). To offset the impacts from the 1997 Asian financial crisis, the Chinese government took the action to promote private housing purchase. From 1998 to 2002, it lowered the mortgage interest rate five times to encourage market housing purchase (L. Deng et al., 2011). Together with other favorable policies to enable development, the housing industry picked up steam and grew rapidly.” 
  • “With development projects popping up everywhere and concerns about housing affordability and potential real estate bubbles started to arise, the Chinese government decided to switch from enabling to regulating of its nascent housing industry. In the second phase, 2004 to 2008, strict land control measures were put into place, as discussed previously. Meanwhile, numerous actions were taken to curb speculative demand such as raising mortgage interest rate and imposing real estate transaction tax, followed by polices to regulate housing supply structure (L. Deng et al., 2011; S. Wang et al., 2012).”
  • “This has changed in the third phase, when China had to respond to the 2008 global financial crisis, a much more severe event than the Asian financial crisis that had brought down the world’s largest economies. China was in danger of a severe recession as housing price dropped for the first time nationwide. The Chinese government reacted quickly to this. Not only did it reverse all of the restrictive regulations imposed in the second phase, but through both fiscal policies and direct government investment, it pumped billions of dollars into the economy (L. Deng et al., 2015). This time the central government and local governments worked together. Instructed by the central government, local governments loosened up the land quota system to bring more land into circulation for real estate development (Rithmire, 2017). Local governments also came up with their own stimulus measures such as the granting of local hukou (residency status) to homebuyers to encourage housing purchase (Souhu Financial News, 2013).”
  • “The increase in housing investment slowed down considerably in the last phase of our study period as the stimulus initiatives faded away and the Chinese government became concerned again about an overheated economy, resuming many of its restrictive land and monetary policies. Still, housing investment stayed at a high level, accounting for about 10% of Chinese GDP in 2013 and 2014. One important component in the stimulus package that continued into the last phase was the Chinese government’s aggressive efforts to expand affordable housing production (Souhu Financial News, 2013). In 2008, China pledged to provide affordable housing, mostly through new construction, for 7.47 million low-income urban households. Half a year later, the government doubled this goal to 15.4 million households. In 2011, the government announced a new plan to build 36 million affordable housing units in the next 5 years, accommodating about 20% of all urban households (Chen, Yang, & Wang, 2014).”
  • “We have compiled all of the data from various statistics yearbooks published by NBSC, including the Real Estate Statistics Yearbook (NBSC, 2016) and the Urban Statistics Yearbook (NBSC, 2017). We apply a methodology well established in the literature as discussed above, subject to data constraints in the Chinese context … published by NBSC is the average residential sales price per square meter, calculated as the result of a jurisdiction’s total residential sales revenue divided by total residential sales area in each year … [it is] widely used in China to describe housing market conditions at both national and local levels. We also use it to calculate housing price changes for the 35 cities during the study period … In addition to housing prices, we also need variables to measure development costs, including land cost, capital cost, and labor cost.”
  • ”Given our discussion, we identified two possible effects from the Chinese government’s interventions since 2009: the overall expansion of housing production and its responsiveness to housing price changes. To test them, we separated our panel data into two time periods, the first from 1999 to 2008 and the second from 2009 to 2013. We use the dummy variable POST2008 to indicate the second period, with the first decade, the period of 1999 to 2008, as the baseline. The coefficient for POST2008 measures how much larger housing investment has become since 2009 compared to its size in the first decade. In addition, because our data show a high level of growth in housing investment from 2009 to 2011 and reduced growth afterwards, we further distinguish the second period into two phases, the stimulus phase of 2009 to 2011, as measured by the dummy variable STIMULUS, and the poststimulus phase of 2012 to 2013, as measured by the dummy variable POST_STIMULUS.”
  • “In addition to the temporal variation from state interventions, an equally important issue is whether the dynamics of housing supply—that is, whether the ability of housing production to respond to housing price changes—varies by place … This issue is also important for our study given that our data come from 35 cities that have considerable variations in land endowment and local economic development, which affects the availability of land and how local governments regulate development … we group the 35 cities into these four regions. Table 2 shows this grouping.7 As Table 2 shows, as the most developed region in China, the eastern region contains the largest number of cities we study, 14 out of 35.”
  • “Figure 6 shows how the mean housing price in each region grew over time during the study period. As Figure 6 shows, not only did the gap between the eastern region and the other three increase over time, but this increase accelerated after 2009. Though a strong housing demand may explain for much of the price growth in the eastern region, it would be important to know whether the housing supply system also played some role in it.”
  • “Table 3 presents the results of the three models as discussed in the last section. Model 1 is the basic model; model 2 adds three variables to capture the temporal effects of state intervention on housing investment; model 3 adds another three variables to capture regional variations. Because we use panel data from 35 cities, we choose a fixed-effects panel data model together with the two-stage least squares for the estimation.”
  • “As Table 4 shows, the price elasticity of housing investment produced in model 1 is high, about 8.08 for the entire study period. However, the adjusted R2 was only about 50% (Table 3). After we add three variables to control for the temporal effects of the state intervention since 2009, the adjusted R2 rises to 89% in model 2, showing the importance of separating the post-2008 period from the previous decade. Consequently, the coefficient for variable HPchg becomes smaller in model 2, which translates into an elasticity value of about 5, as shown in Table 4 … What does model 2 tell us about the impacts of the unprecedented state intervention on housing investment in the post-2008 period? As Table 3 shows, the dummy variable POST2008 in model 2 is positive and statistically significant, indicating a much larger housing investment since 2009 than in the first decade, almost 10 times that of the first decade in nominal values.” 
  • “In addition to the countermarket effects from stimulus initiatives, the negative relationship between housing investment and price changes is also likely to come from the Chinese government’s aggressive promotion of affordable housing development since 2009 in response to the soaring housing price. A recent study by Chen and Nong (2016) finds some evidence that massive affordable housing developments in China have crowded out market housing development, which can also contribute to the negative relationship between housing investment and housing price change during this phase.”
  •  “Comparing model 2 and model 3 shows that variables included in both models have similar directions and significance levels. Still, model 3 shows that some regional differences exist. The interaction variable Eastern HPchg is negative and statistically significant, indicating a much lower elasticity value in the eastern region than in the baseline case of the northeastern region. The other two variables, Central HPchg and Western  HPchg, are not statistically significant from the northeastern region, showing that the other three regions have similar housing supply dynamics.”
  • “Table 4 reports the calculated elasticity values based on the results from model 3. As Table 4 shows, before the 2009 stimulus actions, the price elasticity of housing supply is only about 1.36 for cities in the eastern region and about 16 for cities elsewhere … To those familiar with China, this regional difference may not be surprising. As the powerhouse of China’s economic growth, the eastern region faces tremendous development pressure. The competing demand from other urban uses may have limited the supply of land for housing development in the eastern region, though this is less of an issue in other places. Moreover, because the eastern region contains the most productive farmland in China, the central government’s efforts to limit land conversion from rural to urban uses were the most restrictive in this region (Ding & Lichtenberg, 2011).”
  • “Table 5 compares the average annual land sales for real estate development among 35 cities grouped by the four regions … land sales in the eastern region were severely constrained compared to the other three regions for most of the study period. Only in the early years of 1999 to 2003 did the eastern region see significant growth in land sales. After 2003, as the Chinese government tightened its control on land supply, land sales in the eastern region dropped considerably, rebounded slightly during the stimulus phase of 2009 to 2011, but fell again after 2011.”

Shane Phillips 0:05
Hello, this is the UCLA housing voice podcast. And I'm your host, Shane Phillips. This week, we're joined by Lan Deng, who's sharing some of her research on housing reforms in China over the past 40 or 50 years, and on some of the outcomes of those reforms in more recent decades, because of that broad scope, we cover everything from the reforms in the 70s 80s and 90s. That transitioned China from a state run to a market based housing model, but also some of the 21st century government interventions in response to the global financial crisis, a growing need for affordable options for low income urban residents, the shock of COVID and retrenchment after many years of over reliance on the development industry to prop up the Chinese economy as a whole. China's housing market is in many ways very different from those of Western nations, and its political system is more different still. So there are limits to the lessons we can draw from it. But as you'll hear, there are also more similarities than one might expect. And the differences are worth learning about as well. Lon makes a really interesting point that the way people respond to rising incomes is broadly similar across many countries, demand increases for larger and better appointed homes. At the same time, how that housing is supplied varies widely due to different institutional and political contexts. We can learn from those different approaches, approaches that may never have been tried or even dreamed of locally, even if we can't usually transfer them wholesale from one country to another. I always learn a ton in these broad historical overview episodes. And I love hearing about how different places tackle often very similar problems to our own. And I hope you do too. The housing boys Podcast is a production of the UCLA Lewis Center for Regional Policy Studies. With production support from Claudia Bustamante, Jason Sutedja and Gavin Carlson. If you have a question or show idea, send it to me at Shanephillips@ucla.edu. With that, let's get to our conversation with Lan Deng.

Lan Deng is professor of Urban and Regional Planning at the University of Michigan. And she's joining us today to talk about China's housing market and the ways it's changed and been reshaped over the past several decades. And a bit about where things stand today. Lan. Thanks for joining us. And welcome to the housing boys podcast.

Lan Deng 2:41
Thank you Shane

Shane Phillips 2:42
And my co host today is Paavo

Speaker 1 2:43
Hey, Shane, how's it going? Good to see you. And I'm so excited to see you online. And you're joining us for this podcast. I have appreciated your research for a long time. It was very useful when I was living in Hong Kong trying to learn about Chinese urbanism and housing. So thanks for joining us.

Lan Deng 3:01
Thank you both my pleasure.

Shane Phillips 3:03
So Lan, we always ask our guests for a quick tour through a city or a neighborhood that they've lived in or live in now that they know well. Where do you want to take us?

Lan Deng 3:12
So that's a good question. So I want to talk about the city of Chongqing. I actually didn't grow up there. I grew up in a small town that's about two or three hours by the high speed train from Taunton. But Chongqing used to be part of the Sichuan province of where I grew up. My parents now live there. So I have been visited many times in the past two decades. It's a very interesting city. And, you know, basically just in terms of his geography. Yeah, I think it's a pretty famous, I'm sure Paavo, and Sane you also know about this.

Speaker 1 3:43
I remember there was these articles where they would say it's the biggest city you've never heard of, like until then everybody has heard of it now.

Shane Phillips 3:50
Yeah, it's true of me until I think like two years ago, I don't think I'd really heard of it, or at least I didn't know, maybe seeing the name but knew nothing about it.

Paavo Monkkonen 3:59
It's now known

Lan Deng 4:01
it's a mega city that has a population, you know, the administrative area that includes both the core city and the suburbs that has 30 million people. So that's probably why people say to largest city in China, by the core city area has about a two minute which is still huge, right? So it's kind of very interesting, you know, it's sitting at the intersection of two major rivers, but also surrounded by mountains. The entire city was built along the edge of the mountains. So sometimes people say it's a mountain city. And I find very interesting is because, you know, this city used to be like an old industrial city. It has a lot of manufacturing plants. A lot of the manufacturing plants were built in the mountains in the 1950s 1960s. Because it was viewed as very safe, it will be difficult for enemies to invade, right to occupy those places. So there were a lot of industrial use before, but then in the last several decades, so many of those plans were moved outside the core area, and the you know, the core city has really changed form itself. So has a very low, I would say had very diverse and dynamic economy. And there was a lot of development of course, you know, just like many other Chinese cities, and those development, you'll see those high rise buildings dispersed through these hills. And also you can have the, the subway lines. One incredible saying is that WhatsApp line, I can run through an apartment building. So the apartment building was built around. You probably have seen some of those pictures and eggless. But what I have found interesting is that even though with all these developments, the city has really done a very good job of preserving manually to audit labor goods as really just like it's a big city, but it's not it's overwhelming, like Beijing or Shanghai. Every time I visited, they still gave me this hometown feeling. And of course, you know, it's food right, also known for its kind of spicy cuisine and hotpot in particular. So you can probably walk into a hotpot restaurant that every 10 or 15 minutes, there's so many of them in a city. It just so far, every time I went there, I just there's so many interesting things that we can do. Yeah, I look forward to see it again this summer.

Paavo Monkkonen 6:10
I want to go there with you. It sounds so fun. I have you know, I really love that region of China and the food is delicious. And also I think I mean, I understand changxing is, was really a pioneer in kind of giving migrants more rights to urban amenities and kind of doing some political stuff that was pretty innovative for major Chinese cities. Is that right?

Lan Deng 6:29
Yeah, it's probably building more affordable housing units than any other Chinese cities.

Shane Phillips 6:35
Is it also the city where I think I've seen videos of these high rises, you'll have like an entrance on one side, maybe on the kind of like downslope side of the mountain, or the ground floor and you can come out on the ground floor or the opposite side of the building in or out like 10 storeys up that kind of thing. And then you just got hated how they tie that all together is, is incredible.

Lan Deng 6:56
I don't know, it just I think there are a lot of miracles of urban development. And it's very interesting. Yeah.

Shane Phillips 7:03
So this week's article is titled market development, state intervention and the dynamics of new housing investment in China. And it was published in the Journal of urban affairs with Jia Cheng back in 2019. The study describes a range of market reforms and state interventions taken by China's government over many years. And it measures how responsive investment into housing development has been to rising prices there. This is the price elasticity of housing investment. Normally, we would expect a market based economy to increase housing investment, when prices are rising and decrease investment when prices are falling. And that would give us a positive number. In either case, for the price elasticity, investors will jump into a market when they see prices rising, and they'll exit when they're dropping. That all makes sense. But while China has instituted a lot of market oriented reforms, I don't think it's what most people would call a market economy. And so there's a question about how much its housing market follows that that overall trend, it's a different kind of market economy. I see you waving your head back and forth.

Speaker 1 8:07
Market economy with Chinese characteristics. Yes, yes.

Shane Phillips 8:11
So the study period is 1999 to 2013. But part of why we were interested in this topic is the more recent turmoil in China's real estate market, which has been making global news. So we're going to get ourselves a good foundation in the history of China's housing reforms, but also tried to talk a little bit about more current events. In case I need to explain why we're interested in China's housing market, I think three points will suffice. First, although China's overall economy is about three quarters the size of the US economy, it invests about twice as much as we do into housing, it is just a much bigger share of the economy there. And this gives us one view of the possible consequences of that, albeit within a very different economic and political structure. Second, the Chinese Communist Party is generally much more willing to intervene in markets and much more forcefully than most other nations. And their experience may have lessons for how other national governments should or could approach housing market interventions. And then third, China is home to 1.4 billion people about a sixth of the world's population, and its urban population has been increasing by about 20 million people annually over the past decade, which is the equivalent of the entire population of Chile or the Netherlands, moving from rural areas into cities each year. building housing for these new city dwellers is obviously a huge challenge, and it is hugely consequential even beyond China's borders. So we're going to see what we can learn. So as I said, this study is about housing prices, housing development, and the relationship between the two in China. Before we talk about those details, though, Lon I was hoping you could just first summarize some of the reasons you wanted to do this analysis. I shared a little bit of my own impression already. But in your own words, why did China housing price elasticity, the responsiveness of housing investment to prices interest you, why is it important or useful to understand this better?

Lan Deng 10:08
Yeah, so I have always been interested in studying housing supply. So as someone who has been studying how to economics for a while, you know, several decades now, I feel that there's a lot of discussion about the housing demand, especially in the Chinese context. So we often hear people saying, well, the economic growth, right, the population growth, urbanization that had been driving Chinese housing market, but we didn't hear people talk about, like, how housing is actually built. And I think this it, again, it's a case in China, but also for the Housing Studies in general, that there seems to be far less attention about how the supply issue. So that's kind of one of the reasons. Another reason I'm very interested in studying hoarding supplies, because compared to how the demand, you know, we know how the markets are affected by both demand and supply, compared with housing demand. You know, if we compare countries across countries, there's a strong similarities in housing demand, I would say, across countries, like for more countries, you know, with economic growth, household income increase, so you can expect households would want better housing, you know, like your housing. So the housing preferences are pretty similar across countries. But in terms of housing supply, the dynamics for the supply can vary a lot from place to place, because of the institutional context. In the US, for example, we know we talk a lot about the single family zoning by in China, China does not have these kinds of, you know, single family zoning, but XR has its own issue. And you know, the very important issue is about like how urban land is supplied. So that institutional context I find it very intriguing. So you know, d&i, we my co author at UTS. And I, we work together on this paper. So we want to look into this issue about exactly what is the dynamics of housing supply in China. But then we decided to focus on measuring the price elasticity of the housing supply, because the vinyl can tell us about how new housing investment has been responsive to housing price change. As she mentioned before, when housing price increase, we would expect the more investment right, we would expect the more housing production, but by what degree, right, whether this increase is enough to accommodate in the increase housing demand. So we want to know that, then we will be able to figure out, okay, if we are saying that there is a increase in housing price, what is driving that increase in housing price, and if our measurement shows that the law says violence is high, that means that with the increase in housing price, which is probably the result of increasing housing demand, then we can expect the housing production housing investment to increase significantly and to be able to accommodate this increased demand. And what are the means that if we observe an increase in housing price, then that increase in housing price should reflect the underlying cause of development. So price increase will be driven by the cost of development, not driven by supply shortage, by come to us if our measure shows that if the elasticity value is low, that means with increasing housing price, the increase in supply will be limited. And then that wouldn't be an indicator that we're there is some problem with housing production with housing supply, right, the housing supply is not able to increase sufficiently to accommodate the rising demand. And in that case, we could argue that the increase in housing price is very likely to diverse, you know, to be different from the cost of development because of the supply shortage, then I think that also gave us reason to think about what actions we can take to address the housing affordability problem, especially in terms of controlling the rising housing price. So that's kind of some of our motivations you undertaking the study, we just feel that this is a very important indicator that needs to be measured. And that can't give us important insights on how the housing market have worked in the Chinese context.

Shane Phillips 14:00
So throwing out all nuance here, is it fair to say that the price elasticity of housing supply when it's higher, is generally a sign that things are working as intended that the supply is responsive to increasing demand. And the price of new housing is probably pretty close to the price of actually providing that housing. It doesn't have additional regulatory costs added to it. And as it gets lower, that's kind of a warning signal that maybe some reform is needed. Something is going wrong.

Lan Deng 14:31
Yeah. That's a good statement. Yes. So we would want the EULA sis Viola to be high enough that shows that the housing supply system can respond to the changes in how the demand high violet would indicate yes, I think the housing sector would be able to produce enough housing to accommodate the changes in demand.

Shane Phillips 14:50
Got it? I'm sure there's also cases where a price elasticity of supply can be too high, but we will not worry about that right now.

Speaker 1 14:57
And can I just jump in real quick because you mentioned that A comparative element of this study and you don't really get into it in the study, because it's beyond the scope of the paper. But I think it's noteworthy here to we're talking about the kind of framing of China's urban development over the last decades, it's just extremely impressive to see the way formal housing has been built at relatively high densities with transit and road connections in a way in a country that's urbanizing. so rapidly, because usually, when countries are urbanizing, rapidly and you know, developing economically, that's not the way cities grow, right, cities are usually growing more with a more informal development and kind of more scattered and less kind of regulated unless organized, well organized in a different way. Right, unless by the state. And so I think, you know, Chinese urbanization has been very impressive in that sense. I don't know if that's your perspective as well.

Lan Deng 15:48
Yeah, I think so. So if we look at the development record, I think China has built Minette of other units within a relatively short period of time and to accommodate population growth, migration, right. So I think that's, that's very impressive. So overall, I, you know, I think in our paper, we talk a lot about how housing reform has enabled this process. But we have to keep that in mind. And as if we look at some of the living standards, you know, in 1978, I think before China started the total reform, the average living space per capita at that time was only about 6.7 square meters per capita. So that's about 67 square feet. But today, I think the average living space per capita for urban residents is about 40 square meters, per capita. So it's almost like six times. It's a huge improvement.

Shane Phillips 16:40
And can you give us a sense for how much housing China has been building over the past few decades, and to the extent that we can measure it, like how much it needs?

Lan Deng 16:49
So the thing about 10, is how the it's very hard to count by the number of units, because they are the official statistics that the attendees can publish is public, your bottleneck the build area. So measure I mentioned, like square meters. So in general, I think China has been building about 1 billion square meters every year, in the last two decades or so. So that's massive development. But they don't count is in like number of units, like what we say in the US statistics.

Speaker 2 17:18
So that's 10 billion square feet. If each unit was 1000 square feet, which would probably be large, maybe not, that would be 10 million units a year.

Lan Deng 17:29
Yeah, there was some data that showed like 200 million new units between three decades.

Shane Phillips 17:34
Wow, that's a lot. Okay. In the US, I think we build somewhere on the order of one to one and a half a million a year on average. So it's about five, six times more, seven times more in China over the past 30 years for a population that is four times larger, roughly. Alright, so as I said, we want to talk about the history of China's housing market reforms so we can better understand how we got where we are today. You write that China's for profit housing development industry started in the mid 1980s. Can you paint a picture for us of the housing landscape in the years before that transition began and some of the reforms that helped it move toward a more market based system? Who built housing back then? And what problems was this transition intended to solve?

Lan Deng 18:24
Yeah, so China started housing reform in the mid 1980s, as you mentioned, before that China was under what we call the welfare housing system. So the welfare holiday system is a part of the planned economy. Under the welfare housing system, housing was not a commodity. So it's not something that's traded on the market, there was no housing market. Instead, there was a component of the social welfare. And it was provided mostly for free by employers, which we call them as a work units. And those work units include government institutions and state owned enterprises. So these work units, these employers, they have to provide housing mostly for free because the workers salary was very low. And they also have to provide some other basic needs, like public education, medical care. So the Chinese household in specially the urban area, they had to rely on this work unit for for their housing. And the problem is that because the housing unit was provided for free, that means they don't own housing. So these are rental housing. So the rents households pay was very low, with a very low rent, the rental income often cannot cover even cover the basic operation, you know, and basic management expenses. So as a result, you can imagine that those work units would not have the incentive to invest in housing development, because they're more they built, the more money they were likely to lose, and even also didn't have the incentive to maintain those units. Well, so as a result, the housing condition in China was pretty bad. You know, before the reform in like around the late 1970s. There was serious housing shortage, overcrowding was common. And the physical condition of the unit was also pretty bad. So that's the issue that the Chinese government was facing at that time, and a very important reason why they want to launch the housing reform.

Shane Phillips 20:14
Yeah. So I guess that this helps explain why there was about six, seven square meters of space per person back in those days.

Paavo Monkkonen 20:21
And as part of the reform, I think, you know, it's worth we shouldn't not mention the land reform and the introduction of the 99 year lease, I don't know maybe if you want to talk about 1978.

Speaker 3 20:34
Yeah, so the land reform, it kind of goes along with the housing reform. So land in China is stayed on. Basically, there are two types of land ownership, and the rural land is owned by the collectives, like villages, right, the farmers collective owned the rural land, but or the urban land is owned by the state. And of course, how they was not a commodity, neither was land. So land was also provided, if you want to build the housing, and then the government would allocate the land for housing development. So that's before the reform, right? You cannot purchase land for housing development, there was no for profit housing development. But now the Chinese kind of want to promote a market the housing industry, they want to have a professional real estate development industry. And that means this industry will need to purchase land. So when land or state owned, and you theory, you cannot own the law, you cannot purchase the ownership. So what happened in China is that in 1998, they tennis government had lunch to the land reform by amending the Constitution, to separate the land use rights from the land ownership. So developers who want to build a housing, they can purchase the land use rights, even though they will not be able to own the land. So the purchase of land use rights from local government and for housing development. So the land use rights can be purchased for 70 years. So you can build housing and then sell their housing units to urban households with land being leased. So that's called you know, the land has become a commodity. The land use rights is now traded on the market.

Paavo Monkkonen 22:06
Yeah, I think I just remember my former colleague, Anthony at Hong Kong University, would he I think he went to the first auction of land for leaseholds, like in seventh in the 70s. in Shenzhen. Yeah. And so there's something about that. And it's fascinating how that system that was from the British king owned all the land and would lease lease, they use rights to people that like went through Hong Kong, and then like China adopted this lease. I mean, I don't know if, you know, maybe there were there were other places that were doing it where they got that idea, but it seemed like probably from from Hong Kong.

Lan Deng 22:37
Yeah, the Hong Kong housing system land has huge influence on China's housing. Another.

Speaker 1 22:42
Yeah. And then the, I mean, we don't have time to talk about this. And we don't know what's going to happen. But I think, you know, in 40 years or something, we'll come back and talk about what happens when those seven year leases, when the first leases come up. I think that's such a fascinating topic, but not today.

Shane Phillips 22:57
I do want to go back really quickly, and just talk about the decision to institute market reforms and why the Chinese government felt like that was the direction to go. So I think people might wonder, you know, it's the Communist Party. They're very strong on like, state owned enterprises and so forth, I understand that the incentives with the work units were not aligned. And we're leading to both a shortage and low quality of housing. But why not? Have the government just build a lot more housing itself and have like a dedicated arm to do that, or all of that, or most of that, rather than hand over a lot of this to the market? What was the rationale for that?

Speaker 3 23:37
Well, because I think the old system was kind of for the government to build. So those state owned enterprise and, you know, those government institutions that were part of the government. And it turned out, this did not work, right. So there was housing shortage and holiday housing issues, that especially the more housing you build, the more money the government has to invest in maintaining operating this housing. So the Chinese government did not feel it has the ability to do that. So that's why in the early phase of the housing reform, some of the early years efforts the Chinese government undertook was actually to privatize the existing public housing units, so that the government did not need to continue invest in you how they just didn't have the resources to properly maintain those units. Most of the public housing units were sold to the families living there.

Speaker 2 24:26
I guess there was probably a feeling of, you know, we only have so much revenue, so many resources, and the market can provide housing without subsidizing it for many people, not all and so why not let it do that. And then they still have systems in place for assisting poor households and that kind of thing as well. And we can get into what those look like a little bit later. So previous research on the ability of countries to supply enough housing especially during periods of rapid urbanization and development as China was experiencing, point to to particularly in Portland factors which you summarize as, first, the nature of the development industry. And second, the availability of land. We talked a little bit about the first one and the shift toward more profit driven, private market oriented development. And I think it is fair to say that over the years, China's development industry has grown more similar to industries and market economies like the US. The same cannot be said for land, which is controlled by the government in China, but mostly privately owned here in the US, at least in in the cities in China, it's controlled by the government. Tell us a little bit more about some key facts about land ownership, and especially how land is allocated for real estate development in China. I think we haven't really touched on that yet.

Lan Deng 25:43
So I mentioned about the land reform that separated the land use rights from the land ownership. So the land use rights could be traded. But in China, it's a local governments that are in charge of setting those land use rights. So the local governments can be viewed as representing their state. So they sell those land. And then developers who want to build projects, including market housing, they will have to purchase the land use right from the government, and they actually purchase them from what do we connect open land market? So the government would every year would release How much land you wants to sell? And what can development would it be allowed, and we would actually publicly publish this information, and the developers will have to bid for this land. So there is this auction process, the ones that offers the highest price, typically, we'll get the land. But of course, there are some variations, right, sometimes, you know, if the developers proposed to do affordable housing development, and they do not have to be the for land, so the government, we provide them plan to reduce the price, or there could be some other consideration. But for most of the market, the housing development, that developers have to purchase the land through this auction process, and those with the high speed will get the land. So that's how the land is located to the highest and best use whoever can offer the highest price.

Paavo Monkkonen 27:01
Maybe we can talk a little bit about more about that auction process and what the local governments use the money for one. One thing that I always thought about when I was living in Hong Kong was like, what a prudent monopolist, the Hong Kong government had been for lo those many years of the colony. Because if you think about it, right, they owned all this, you know, they had control of all this land, and they were selling it to fund the government. But I always thought like, why didn't they just sell it all in 1890, and like, get all that money right away. So it's like pretty impressive that they're slowly selling it to keep the price high, you know, you know, letting just a few parcels every year to make sure that they have money for next year. So I don't know if that happens, and how that kind of phenomenon works in China in terms of in mainland China in terms of how local governments think about the land auction process for housing and the role of that in the local government finances.

Lan Deng 27:51
So the government wants to control the pace of land supply, right. As I mentioned before that for these rural lands will land in urban fringe area, they were first owned by the rural collectives, right. So the local government will have to acquire this land get this land from the farmers first. And then they provide the compensation at a fairly low cost, because the compensation was calculated based on the agriculture use. And of course, agriculture, Justina generated much income, so it's for much of our time, so the conversation was fairly low. But then once the government converts that land into urban land, then you can sell it to developers, and it will sell based on the urban uses, right, which would, of course, would be much more profitable. So the land typically would be sold at a much higher price. And now what that means that then the local governments can collect significant amount of revenue from those land sales. And this land sales revenue is a very important revenue source for local governments. In China, there is no local property tax. So there is no dedicated local revenue source for local governments. So land sales revenue are basically a function, the way that the property tax revenue function for the US government, for example. So that's very important to keep in your mind. So local government rely on the land sales revenue to fund a lot of its activities. And also because some of the other revenue sources and local governments collect some other taxation revenues they collected, they have to share with the central government. But land sales revenue is one of the very few local revenue sources that local governments do not need to share with the central government. So they almost have complete control on how they can spend this money. And that's how the local governments have been using the land sales revenue to finance this massive infrastructure development that we have seen, as well as many other activities, even social welfare programs in China.

Speaker 1 29:36
Yeah, that's, that's fascinating. And, you know, when I was living there, there was the beginnings of the discussion around introducing a property tax to like wean local governments off the reliance on land sales, is how has that progressed? I mean, in a few cities, I know they introduced one but I don't know if I haven't followed it and to see whether it's was functional or not.

Lan Deng 29:57
So the attendees come experimenting Under the property tax system, I believe you Shanghai and the Trump team, right by the highest end be implemented at a larger scale.

Speaker 1 30:06
Yeah. Cuz in the long run, you know, at some point less quickly, it seems like that's maybe starting to happen. Yeah.

Shane Phillips 30:15
Well, it's interesting, though, because Pablo, to your original point about how prudent the British government was with retaining ownership of land, the lease sort of allows you to repeat this process indefinitely, where you sell the land, the lease runs away, 70 years or 99. But then you take ownership back, and you get to sell it again, with the building on and if it's still, you know, worth keeping. It's a long process, and you still have to draw it out. But it's not a one time thing, in theory, at least.

Lan Deng 30:46
Right? Yeah. But also, I think, in terms of the revenue collection perspective, you also want to maintain the stability of the land price, right? You want the learner price to be able to continue to grow, right. So that's also gave the Chinese government incentive to maintain or restrict the supply of land at certain time points so that you can maintain the stability of your, your land price, and from a revenue collection perspective,

Speaker 1 31:10
then indirectly, I mean, I think I don't know if I've, if I've seen work on this, or I've just heard people talk about this. It's also a way to keep densities of development fairly high. Because if you're restricting land, do you think that plays a role in terms of the density of new development? Or is that more regulatory, or why is the density of development relatively high,

Speaker 3 31:30
What land cause has increased very fast and then the cost in China has I can increase at a faster pace than housing price. Some of the research I have done showing that the housing price in the last two decades ago had rising about 9% per year, for lambda price has been about 14% per year. So you know, with this rapidly rising land cost, of course, we can expect that developers will build at a much higher density, right to offset the cost of land. So that doesn't need too much higher density development in a central area with pretty high land price.

Shane Phillips 32:01
I was not aware that China generally did not have property taxes. And that kind of explains for me a little bit of the run up in prices and the speculation and everything where it's just there's very little, there's not as much holding costs for owning property. And even if it's kept vacant for some amount of time, but it's going up in value five or 10% every year and you're paying no taxes on it, then that's a pretty good investment actually, for as long as the prices keep going up, which we're in a different situation now. But we see something similar in Canada, and particularly in Vancouver, BC, where the effective property tax rate there is like point two 5%. And you could just park your money there and get pretty wealthy just off the appreciation on your condo or home.

Before we move on. Maybe we could talk a little bit about the state owned enterprise developers, you have another very recently published paper. That's fantastic. I read it today on the evolution of the housing development industry in China. And we will put that in our show notes. Yeah, everyone should read that I was shocked to see what a small share they are now of the real estate development industry is something like from 30% to 1% of developers are staying on enterprise. So maybe you can just describe for people that might not be familiar with that kind of developer what what they are and and how they differ from private developers.

Speaker 3 33:16
Yeah. So when they when China first started the housing reform Canada did not have a profit driven real estate development industry, right. So the first I would say the early years of the developers that started to build housing for sale, were actually that we kind of spin off from your state owned enterprise or government institutions. So they were actually part of the existing institutions, right, the older institutions. So in the early years, these early developers, they were dominant either by those state owned enterprises, and some of them were collectively owned. And some villages also created development companies to build a house in the villages that they also say these opportunities. But of course, the housing reform progress, as the housing industry expanded, there have been a significant increase in the number of private owned firms by private firms. So the state owned enterprises, many of them cannot compete with the private firms. And also over time, the Chinese government also did not want many of the state owned enterprises to be so heavily involved with real estate development. So there were also kind of requirements from the Chinese central government that these enterprises have to stop building housing right so that their housing can be built by private firms. So the share of state owned enterprises in real estate development have become very small pebble you may see today, tell me about Nick 1%. But consider that the total base, there is a total of about 100,000. Real Steven, I'm a firm, human one person is still in terms of lumber is still quite significant. But I think even though the number has become small, and those state owned enterprises, actually pretty influential because they have this advantage, you know, they're state owned, they have all these ties collections with the government. So that gave them advantages in terms of getting land or in terms of you know, getting loans from the banks. So as a result, even though the number of state owned firms have become small, the ones that still exist, they tend to be very large. So if you look at the top 100, real estate developer firm in China, 20 of them stayed on. So there's small number of real similar firms play a much larger role than what they share indicate.

Paavo Monkkonen 35:20
That's interesting. And then how much does the housing that they build differ from the housing that private developers build,

Lan Deng 35:27
I do not see a significant difference in terms of the quality of housing or in terms of the size of the housing, I think, again, because they're probably much more likely to undertake a large scale development, because again, they probably are more likely to get, you know, large piece of land, especially I think the access to land is critical. state owned enterprises, it'd be much easier for them to get land probably at some of the more desirable locations.

Paavo Monkkonen 35:53
Yeah.

Shane Phillips 35:54
Are they more likely to build for low income households like below market housing, that kind of thing? Or are they generally just kind of competing with the private folks?

Lan Deng 36:02
I think it depends I sometimes for some of the state owned enterprises, they tennis car may require them to provide more affordable housing. They're also easier for the government require the state owned enterprises to build affordable housing, and then private firms. So that has been the case. But I haven't seen data on exactly that. You know, how many more affordable housing units there have been building?

Speaker 1 36:23
And I promise I didn't bring this line of questioning up just to mention the paper that I wrote on state owned enterprise developers. But I did write a paper on state owned enterprise developers in Chengdu and it was I mean, there were I feel like I mean, it's a great paper, you should check it out. Audience but yeah, I was so excited to see that you said, there's only two English language papers about this topic. And then mine was. But yeah, there were a lot of questions remain because we found Well, I mean, the main finding was, because we were looking at transaction data and comparing student interest developers to other kinds of developers, we find they were selling otherwise similar units using the data that we had, which was not a full set of observable characteristics, but like size, and building size, and location, and all these other things at a lower rate. So like 7% less than private developers, and we what we couldn't figure out was whether that was because they were getting cheaper land and had, you know, connections with the government in a way that they could make the same profits by undercutting the market, or they were building maybe lower quality units in in ways we weren't measuring.

Lan Deng 37:27
I think it's probably more likely, because of the lower land costs, or even just the acquire land probably much faster than private affirm that also save cost, they do have a lot more advantages in that aspect.

Shane Phillips 37:40
They presumably also want to profit, but they don't really have like target rates of return, like an investor would correct or is that wrong? Do they also have private investors?

Lan Deng 37:49
I haven't looked into that it's very complex. So it's come from for the State Owned Enterprise. Yeah.

Speaker 1 37:55
But speaking of money, I think, you know, one thing we haven't talked about yet is the banking system. And I wonder, you know, how much the banking system shapes the housing investment and real estate development, banks are owned by the government in China, and I imagine they are following five year plans in terms of where they want to lend more and where they want to lend a lot less. So I don't know if that's something you'd looked into specifically, but maybe you could talk about how the banking system shapes this,

Lan Deng 38:23
I look into this a little bit, you know, to again, to try and understand the real estate development process. So yeah, banks in China are still state owned, right. And because they're state owned, and the interest rate for deposits in China is very low. So that means the banks, you know, they are collecting money raising capital at a very low cost. That also means that when they issue these loans, the loans, you know, with relatively low interest rate, right, compared to what developers can get from other sources. So being able to get a bank loan is a big deal for real estate developers, but the same time, so they tend these government's making the central government for very long time has been very concerned about the over reliance of the economy on real estate development. So it has been, you know, the Chinese government have been well aware of the risks associated with this very kind of excessive real estate development. So that's why also have the Chinese central government have very strict regulations on what bank can lend and at what rate, you know, who they can lend. So there's a lot of requirements, the banks cannot just lend to anyone they want to lend. So they have to follow these requirements. They have to make sure that loans are given to the developers who were perceived of low risk, and most likely those will be very large developers, or you know, state owned enterprises. But of course, you know, the real estate development may have been massive in China. So that means there's a lot more developments that probably have to get funding from other sources they will not be able to get from the bags. So the OSI is other sorts of funding for for development projects.

Speaker 2 39:54
Yeah, and I imagine the banks are the lowest cost source of funding. Certainly compared to any kind of private investor, yes. Alright. So we have a general understanding now I think of the housing development industry and the policies that are shaping it and how they've changed over time. And some of the ways that the local governments participate and shape it as well. A lot of your article centers on the national governments the central government's response to the global financial crisis, which includes various policies and interventions since about 2007, or 2008, could you give us a high level summary of how the global financial crisis hit China, especially with respect to housing, and how the national government responded,

Lan Deng 40:37
So the global financial crisis started in 2008. So the nine triggered by the mortgage foreclosure crisis in the US, right, so the mortgage foreclosure crisis since the US economy into a recession, and the Chinese economy at the time, even today, still very much export oriented. So that drop in global demand from the US and also some other advanced economies, so that he can, it can be pretty hard, right, the exporting industrial was shrinking, and the unemployment rate was rising. So that also led to a contraction of domestic consumption. So the tennis housing market also was hit hard. Before the global financial crisis, housing price in China was increasing every year at a pretty fast pace. But in 2008, was actually the first time the Chinese housing market and saw a drop in housing price. So that was a pretty clear sign that the housing sector was in trouble, and the economy was in danger of a severe recession. So the Chinese government has responded very quickly to that, and realize first that it has to create monetary policy, but not as quickly as possible, and then identify that the housing industry, you know, the housing development, as a sector that would have the potential to help achieve that goal. So that's how the Chinese government through various fiscal policy, and you can direct the investment developers massive stimulus package, I think some of the estimates is at about 4 trillion Chinese un in the stimulus money. And most of their money ended up going into the real sector. I think a part of reason was also because even before the financial crisis, the Chinese economy was, you know, had great momentum, right? The real estate industry, the market, housing markets were doing so well were booming. And so this idea, the government investment had really kind of help boost the sector. And so the housing price, as a result of this, quickly resumed its growth that has actually I think, increased by about 25%, just within a single year in 2009. So that was very incredible. And, of course, that also helped create a lot of jobs, and the help, you know, pull the Chinese economy out of the recession.

Shane Phillips 42:46
Yeah, and I can imagine the appeal of development of construction, in particular, because housing development tends to be very cyclical, where when the business cycle isn't a strong stage, there's a lot of development, but then it dies off very sharply when things get weaker. But of course, the demand for housing is not as cyclical, and people are still moving into the cities and everything. And so I think there's a real justification there. And so, you know, this ties into the results of your analysis. So just getting started with some of these, you found that the price elasticity of housing investment was positive from 1999, up into 2008. And again, that is normal in a market based economy, it means prices and investment are moving in the same direction. But after 2008, you find that the score turns negative, so prices fall, but investment actually increases. So the two are moving in different directions. I gather that this is an effect of the stimulus. I guess my question, though, is, is this a bad thing? You know, we have stimulus for a reason. So is it is it a problem that the price elasticity turns negative? Or how do you interpret that?

Lan Deng 43:53
Yeah, so I think the negative side was kind of puzzling to us first, because most of the papers we read, before, you know, most of their papers, were studying the housing market dynamics in market economies that do not have such a strong state intervention that we saw in the Chinese context. So previous studies that examine price elasticity of how the supply often did not report a negative value. So ours was kind of very interesting. But I think then, you know, you think about what really happened during those years right during the stimulus phase. We do believe that these negative scientists reflect what has happened. I think what the tennis comm have been doing pumping those investment into their holiday sector and with the stimulus is to try to counter market forces, right, because the market forces we're bringing the economy down. So these government US wants to work in the opposite away as what the market logic would suggest. So with the price going down, and there was more investment, even though the investment came from the government and some of the other new fiscal policies, but then when the price has resumed its growth, you know, the market has recovered. And then those government stimulus package fade it off. So that's that we saw a decline in the security investment into the housing sector. So yeah, we do believe that they sign reflects on how they how the sector was functioning in the opposite direction as what the logic for the market would predict.

Shane Phillips 45:14
Another interesting finding is how the results differ in the Eastern Region of China, where the economy is strongest in cities like Shenzhen, Beijing and Shanghai, compared to other parts of China, you generally see lower price elasticity of housing investment in the east, meaning that prices do not translate into more development as much. And I think it's worth noting here, that elasticity are also lower in coastal US cities, that built little housing relative to demand for the last few decades. In China, is this a problem of political, legal administrative obstruction of permitting and building homes in that region in the eastern region compared to the others? Or is it just you know, maybe there's just so much growth? It's, it's genuinely too hard to keep up with it? Or is it something else going on,

Lan Deng 46:02
I think, reflect the fact that, you know, superstar cities are located in the eastern region, Ryan and Beijing, Shanghai, St. John, and the Eastern Region, faced a lot of development constraints. So I think our results just reflect the constraints that housing developer facing those returns. And these constraints come from, like a geography, the existing urban developer pattern, but also come from, you know, government policies with regard to the land supply, you know, the eastern region is a region that already has a very high population density. So the density of demand is already very high there. So there'll be a liability of land is limited compared to the cities in the rest of China. But at the same time, if you look at we look at urban land supply, the amount of land that Chinese government allowed to be sold, is also much less in the eastern ratings and the other ratings, part of reason was because it just happens that some of the most productive farmland is also located in the eastern region. So a lot of the land use planning for the purpose of protecting farmland, you know, that also can very much focus on, you know, that's, you know, protecting those farmland in the Eastern Region. So that also served the purpose of limiting the amount of land for urban development. So there is just a lot more constraints for housing development, either Eastern rating than the other rating. But of course, at the same time, the rating also, like you mentioned, the experience very strong growth. Yeah, it is just also impossible to keep up with these incredible amount of demand.

Speaker 1 47:27
Yeah. And is this partly connected to the Go West kind of efforts to develop, like, from a national spatial planning perspective to develop the center parts of the country?

Lan Deng 47:38
I believe, so it's to spread their economic development to the rest of China. So that, you know, the development pressure is not just concentrated in the eastern region, but also because of, you know, these rising regional disparities. If you just look at the housing price, housing price is a use the rate is so much higher than housing prices in the other parts of the country. Yeah, so I think in general, the Chinese government want to see a more balanced regional development.

Speaker 1 48:04
Ironically, the two countries are doing the same thing in very different ways. United States is pushing people to the center of the country by local MPs regulations, and China is doing it through a national spatial plan. It's very interesting.

Shane Phillips 48:20
Yeah, we're just yeah, we're not doing it intentionally. Intentionally. But yeah, yeah. Yeah. And from from the ground up, rather than

Paavo Monkkonen 48:30
national spatial planning.

Shane Phillips 48:33
So I think it's interesting to talk about affordable housing here and maybe compare to the us a little bit to the Chinese government has made some very big commitments to affordable housing for its low income, urban population. And a passage from your article really stood out to me, which I'll read here. It says, quote, in 2008, China pledged to provide affordable housing mostly through new construction for 7.4 7 million low income urban households. Half a year later, the government doubled this goal to 15 point 4 million households. In 2011, the government announced a new plan to build 36 million affordable housing units in the next five years accommodating about 20% of all urban households, unquote. So the goal went from 7.5 million units in 2008 to 36 million units three years later, in 2011, almost a five fold increase. I'm really interested to know how affordable housing works in China compared to the US or other Western countries, and what kind of progress they ultimately made on that 36 million unit goal. I wouldn't be surprised if the goal has increased further in the intervening years.

Lan Deng 49:39
Well, yeah, so it was a very ambitious goal, right. So 36 million, how the unit within five years and recent research has you. Attendees come have achieved that goal it has that can appeal to more. From 2011 to 2015. XR has built around like 14 million affordable housing units, and the way that affordable housing developers work In China is different from the US in this sense is that the Chinese government set up the goal. So the put that goal is also part of their stimulus package, rather part of their plan to stimulate the economy. But then the Chinese central government, I locate that go to the lower level of government, we will show how much each province needs to build, and then the province come on would have been I locate to them even more liberal government that you know, how much every city has to build,

Shane Phillips 50:26
This is sounding like our housing element process. regional housing needs allocation,

Paavo Monkkonen 50:31
We do not, we do not fund it, because the problem

Speaker 3 50:36
Wll tell the central government also didn't fund it to a very large degree, ask the local governments to fund it. But the difference is that not remember, local governments had to control land supply. So the local government, they have to show, especially the government officials, if they want to get promoted, they have to show that they were able to meet those goals. So that's also part of how their performance review. But local governments control the the land supply. So they have to plan every year, they have to plan how much land to use for affordable housing development, as well as provide some of the other funding support. So that's a big issue. And it's every year, and they also have to report to the higher level of government about how many units have been built, how far they were from achieving their goals. And these reports were also publicly published. So that's how some of the how the scanner internal, were able to add these numbers together and find that, in general, I think this goal has been achieved. So it's a very top down approach, by the fact that you know, the local government control the land supply, and how these land sales revenue, allow them to be able to find affordable housing development, local governments are required to allocate at least 10% of their Vanda sales revenue to support affordable housing development. So that's one of the funding mechanism for them to do it.

Speaker 1 51:57
And we can link to some papers, there's I've seen some really good research on incentives for local government and different government officials in China and how, you know, it's it's this fascinating system where you want to do a really good job as mayor, because then you can be promoted to, you know, Minister of trains or something right. There is like a clear promotion system where, you know, the motivations of mayors are very different from the motivations of mayors in in US cities.

Shane Phillips 52:24
Yes, I'm curious how, or who affordable housing serves in China, like, you know, how it compares to like Low Income Housing Tax Credit housing in the US. And even that's like too broad a question, because in Los Angeles, a affordable housing unit funded by the Low Income Housing Tax Credit is rented at well under half of market rate. It's like 50% 40% of market rate, give or take, if you're in a more affordable part of the country, maybe even where you're at lon, it might be closer to 70 80%. It's still below market, but not quite as discounted. And so it's serving something of a different population. But who is really benefiting from the affordable housing? Who is it targeted at? Is it like deeply affordable? Or is it kind of just a little bit below market? Does it vary a lot and serve lots of different populations?

Lan Deng 53:14
Yeah, that's a great question. So maybe we should go back to some of the history. I may seem that before the housing reform, right, and most of the urban households in China live the encoding provided by work units, which were literally just public housing. So you could view 80% of the urban households and even under public housing, but then with the housing reform, and most of public housing were sold. And then most of the houses that were built were market housing development. So for a very long time, China built very little to build very few affordable housing units for very long time, I would say probably in the first two decades of the cultural reform. And as a result of this, because of the privatization of the previous public housing unit, the fact that so few new public housing affordable housing units were appealed, the amount of subsidized housing in China dropped to be like less than 10% of the total housing stock by 2010. So that means it was very difficult for some of the, you know, low income households in the urban area to to get affordable housing in China. And at the same time, we know that the housing price in China has also rising very fast, and many of them, even young professionals were not able to purchase market the housing. So that was become a big issue that you know, this lack of affordable housing for some of the most disadvantaged households in the urban area. That's also one of reasons why the Chinese government decided to include affordable housing development is a pretty important component of its stimulus package. You know, some of the stimulus money went to support affordable housing development, but the affordable housing program in China the landscape is also very complex, you know, just like the affordable housing program in the US. I also happen to have done a lot of work on low income housing tax credit. Yes, It's very complex, your channel has just like the US your highs programs that support homeownership, but also has programs that, you know, support the development of affordable rental housing. Some of the affordable housing projects were actually housing that were built for sale, and to some of the middle income families. The reason is because the market, the housing price, especially in some of the superstar cities, were so high, even the middle income households were not able to purchase them. So the government has been begging the local government have been trying to expand what we call an economic and comfortable housing, that those units will save some level of subsidy, but not very much, maybe some modest reduction in land costs, and some modest reduction in tax payment. And then these units were sold through this middle income to promote homeownership. But there were also programs that were especially after the stimulus package to a program known as cheap rental housing. So the cheap rental housing program functioned like a public housing. So that targets the most disadvantaged households, you know, households with the lowest income, you know, rural migrant workers. And so those households, the government had been really expanding the cheaper rental housing supply to serve those households of low income, taunting I can you build a very large amount of, you know, the simple rental housing for some years, in general. And if we either or the affordable housing unit together, like the goal that attendees can set up about a 35 minute affordable housing unit, so that covers about 20% of urban households. So that again, has, I would say had a broader population targeting than what the Affordable Housing Program in the US have. One of the new affordable housing program in China is what's known as a new public housing. So this new public housing, housing units are being built. So government subsidies, target those young professionals, college graduates, you know, who were living in those major cities like Senjem, for example. And we know there was no way for them to be able to purchase housing, wheezing, or first of all period of time. So that in China, while the issue is that the rental housing sector is very underdeveloped in China, and so they're also very difficult for those young households to just rent or market the housing by themselves, because there were just not enough rental housing supply on the market. So that's where the local governments have to build this new public housing unit, and rent them out to those college graduates, this young households,

Shane Phillips 57:31
I can imagine with how much housing prices appreciated in China over the past few decades, that there's just a lot of pressure to get people or for people themselves to want to get into owner occupied housing to buy a home, rather than rent. And that probably explains part of the under development of the rental sector, because people feel like, well, even if I can rent affordably now, if I'm not buying now, home prices are just going to get further and further away. And so if I, you know, the sooner I can buy, the more likely I am to ever, and if the longer I wait, the less likely it has to ever happen. Yes, maybe that's actually a good transition, because that was probably the mindset for a long time, I think, you know, development has has crashed, in many ways, housing prices, I think, to some extent to in recent years. So before we wrap up, let's just spend a little time on where the Chinese housing market is at today. I don't really know where to start, I have not followed it closely. So long, I just wonder if there are any facts or policies you think are really critical for us to understand. Maybe looking at the big picture, I think I'm just generally curious about how prices and housing development have changed over the past three to five years, some of the problems that we're seeing, and maybe how some of the earlier policies we talked about, particularly the state intervention, following the global financial crisis may have contributed to that or maybe mitigated it, and how the government is responding today.

Lan Deng 58:51
So I think first, I want to point out that I haven't been able to do field work on housing in China since the pandemic. So I do not have first hand observations about what's going on in China. But I have been reading, of course, you know, the news coverage, and also industry reports by the Rios the industries, and as well as some of my own interpretation about what's going on based on my past work. So I think the issue the attendees housing market face, they're short term issues, but they're also long term issues. And the short term issue is that the impacts from the pandemic, two or three years, right, so there were not a production disruptions during the pandemic, not of housing development projects, you know, they were not able to be finished, even though some of the how the units were, the household already purchased them. So the pre sale unit. So I think one of the immediate concern for China and for the Chinese government was to address this issue about this incomplete housing projects. And when these projects were not finished, and the developers of course, were not be able to collect all the revenue spike right, they will not be able to get the funding or the funding back. So that creates a lot Case flow problem, right? That's also why, you know, some of China's largest real estate development companies were in trouble today, because they do not have enough income to pay back the debt.

Shane Phillips 1:00:10
And there's the developer problem. But I assume there's also the consumer, the buyer problem, where it's a free sale, they gave the money they paid for the home, but it's, it's not being completed. Right?

Lan Deng 1:00:19
Yeah. And it's also a problem for the banks, because many of their buyers, when the purchases units to the pre sale process, they already got loans from the banks in order to purchase those units. And if they are not getting their unit, they will not be paying back those loans. And so that would also affects the banks, you know, the bank would also be negatively affected. So that's a very serious adverse a short term issue. And at the same time, of course, the Chinese economy is also weakened, right, because of the pandemic and some of the geopolitical conflict. So yeah, so the housing market, I think the demand has certainly dropped to some degree. So there, you know, there's not as many housing transactions as there used to be before the pandemic. So I have been saying that I think the Chinese government have been working very hard to reboot this, you know, this sector and trying to rebuild, you know, confidence about the housing market, and trying to promote, you know, encourage more new housing purchases to address, you know, the Stan term issue from post production disruption, and also this weekend overall economy. So over the long term, what I am worried about is about some of the housing oversupply issue in some of the less developed cities in those third here or post here cities. And basically, just because the demographic structure in China has changed, I think the Chinese population has not been growing because of some of the population policies. So the population does not grow as fast as used to be. At the same time. I think the massive housing development does need to some of the oversupply issue. And, you know, some of our research has found in both the paper we're talking today and the recent paper, that you know, that developers were building in some of the smaller places as a result of kind of expanding their development business. So that oversupply issue is something that needs to be concerned about. So in the long term,

Shane Phillips 1:02:13
Along those same lines, is it is it fair to say that the government is trying to sort of put some guardrails or constraints on the housing development industry going forward so that it's not maybe accounting for so much of the economy and the economy is not so dependent on it? And there's obviously a lot of short term pain associated with that both for development and maybe the housing supply overall. But there's this kind of future looking vision where things are a little more right size for the economy and the population?

Lan Deng 1:02:45
Yeah certainly, I think attendees come in has been aware of this problem for a very long time that the real estate sector, the role of resets may only be too large for the economy. And so they have been trying to shift away from those, you know, development driven economic models. And this way, they can also reflect about how they tennis come to view housing. If you look at some of the policymaking recent policymaking right before the pandemic, there was a lot of emphasize thing about like a social equity issues. Right. How do we address the issue about the housing quality? Right? How do we address the housing needs of the migrant workers? And you know, how can we replace the housing policy, not just as a driver of economic growth, but more about provide adequate housing for every household? So there was, certainly I think there has been policy adjustment, and there have been, you know, shift in, in some of the, you know, the policymaking process. But like you said, in the short run, it could be painful, you know, moving away from the the old gross trading approach to a more balanced approach, taking into consideration about what the real housing needs might be with a changing demographic landscape.

Speaker 1 1:03:55
That's what it's one of these, how do we make housing still a good investment, but also affordable? Challenges? Many countries? Yeah, I mean, so many people are invested, you know, all of their savings is invested in real estate. But it's it's such a passionate and important topic. This has been such an interesting conversation. There's so many topics we could have spent a whole hour talking about by themselves. But I thought we could conclude with any thoughts you might have on lessons we could take from China's experience, either positive or negative, and maybe especially for rapidly urbanizing countries that want to build up a housing development industry and get their price elasticity of housing investment positive.

Lan Deng 1:04:34
Yeah, I think this question always come up, right. Whenever you talk about, you know, housing policies in different countries, you know, how can we learn from each other? Right. But it's also the most difficult question because policy transfer is very difficult, right, especially in terms of housing supply is amazing. It's so much affected by the institutional context, and also the culture right, the history and the political economic system. So it's very hard to say you know, exactly what countries can learn from, from China. But one thing I have seen in my own research, because as I mentioned, I have been studying housing policy, both in China and in the US. And once it does strike out to me is that, you know, kind of how much attention the telecom have been paying how much effort the Telecom has made in developing housing policy, including is as kind of a very key component of its macro economic management policies, you know, can vary the importance of providing adequate housing to the Chinese government, which I have not been saying that in the US for very long time, right, because housing policy was, for a very long time in the US, we viewed as more like a residual policy, right, a welfare policy, it's not to the level of importance it deserves is a key component of national economic development, right, you know, even labor force development. So I think that's what the Chinese government has done by looking at this housing policy holistically to look at what role it can play in terms of addressing both economic development needs, but also in terms of addressing issues about political stability, right, in terms of addressing that, you know, the social equity issues. And just like the housing policy should get the level of tension and the level of care it deserved, so that we could develop a sensible policies that fit what the country needs. So I feel that's kind of, you know, for me, I think that's a big difference in my own research between these two countries. And for some of the other developing countries, I'm sure they have their own institutional context, and their own kind of, you know, the needs, but every country, I feel that it needs to recognize about the importance of housing as part of the overall national economic development strategy.

Speaker 1 1:06:45
Well, I mean, yeah, I think that's actually a great insight for politicians, you know, if you want to be popular, make noticeable improvements in people's lives, and then they're going to like that. Right. So this, you know, to the extent that you're able to do that within a short period of time, you know, and get all the credit for it is is a challenge and easier in China maybe then in other countries with shorter, more turnover and in government's

Shane Phillips 1:07:08
Paavo have you been listening to the 99% Invisible episodes on powerbroker? I was gonna say, noticeably improve people's lives nipple, as they call it there. All right. Well, Lon, I agree with Pavo. We could have talked about each of these for another hour, I was biting my tongue on pretty much every topic we brought up to move on to the next but thank you so much for joining us on the Housing Voice podcast.

Speaker 3 1:07:34
Thank you. Thank you for giving me this opportunity. Very interesting conversation. I enjoyed.

Shane Phillips 1:07:43
You can read more about Lan's work on our website. lewis.ucla.edu. Show Notes and a transcript of the interview are there too. The Lewis Center is on social media. I'm on Twitter at ShaneDPhillips, and pabo is at elpaavo. Thanks for listening. We'll see you next time.

Transcribed by https://otter.ai

About the Guest Speaker(s)

Lan Deng

Lan Deng’s research and teaching interests fall broadly in the areas of housing, real estate, and local public finance. She has been studying housing and real estate development in both the U.S. and China. As a planning scholar, she is interested in examining the different types of interventions the two countries have developed to ensure adequate housing and suitable living environments for their residents.
Learn More

Suggested Episodes