Beijing’s notorious housing prices have been skyrocketing over the past few years, with seemingly unstoppable momentum. In a recent report by the International Monetary Fund, Beijing tops the list of world cities as the metropolis with the least affordable housing (price to wage ratio).
Most likely due to China’s housing bubble, the Top 5 list is dominated by mainland Chinese cities, with the exception of Hong Kong, which ranks fourth. Beijing’s real estate price to wage ratio is twice as high as Tokyo, 6th on the list, three times higher than London, and nearly four times higher than New York.
The price-to-wage ratio takes into account each city’s circumstances, as explained by Gwynn Guilford:
“the price-to-wage ratio, which measures median housing prices in a given city against median disposable incomes, reflects affordability rather than absolute property value. This means the mid-range price of an apartment in New York is 6.2 times more than what a typical family makes in a year. By comparison, it would take nearly a quarter-century of earnings to buy a pad in Beijing’s capital outright.
Residential property is a big mess for the Chinese government—and it’s not going away. Last month, prices on new homes leapt 7.4% in June 2012—the biggest uptick since last December.”
The Chinese government has tried a few times to control the real estate market, such as the real estate restrictions implemented earlier this year. However, housing investment continues to spike:
Housing bubbles in the United States, Ireland, and Spain all burst between the years of 2005 to 2007. The amount of real estate investment in China as percent of national GDP is nearing that of Ireland and Spain at their housing bubble peaks; but Beijing’s shows no indication of slowing down.
Gwynn Guilford addresses the problem later in her article:
“…the announcement over the weekend that the government will stop evaluating party officials solely on the basis of their contribution to growing GDP—China’s probably the only country in the world to announce GDP targets as a matter of policy—is truly momentous. If they’re off the hook for hitting targets, it means that local government cadres have less of an incentive to shunt investment to shady property deals to prop up their numbers. It also could make them less reliant on land parcel sales—the prices of which have been rising—to fund their budgets. Part of China’s sky-high housing prices comes from this dependency.. That’s both driven up prices and encouraged over-investment in the sector via shadow lending. But the government still needs something to drive its economy while it waits for its households to start consuming.”
The state-led real estate development has led to swarms of high-rise apartments built on an epic scale, but that does not mean developers can fill these new residential complexes with residents. Ordos, probably the most famous example of China’s “ghost towns”, has been blindly expanding and constructing, as explained in the Financial Times article:
“Local residents estimate that the population of Dongsheng district peaked to 70,000 in 2011, when workers, restaurant owners, and investors swarmed into this seemingly land of opportunity. Now, the population has decreased to around 40,000.
Bei Duoguang from China Renming University says: ‘You cannot simply move farmers into high-rises. This concept of urbanization is very immature, no one takes into account the proper services and infrastructure a city needs to run.’”
It seems that developers and mindless expansion are the culprits to be blamed. Changxing, a town near Shanghai, serves as a model of successful urbanization, because the town has refused to sell its land to developers. Instead, Changxing has focused its urbanization efforts on improving infrastructure, medical care, education, and other social services, rather than expanding into a large city or merge with its nearby city Huzhou.
China’s model of urbanization cannot be changed overnight. It will take more than government regulations for local officials and real estate developers to realize that they need to start thinking more long-term, and that there is more to urbanization than just economic figures. For them, Carl Sagan’s words couldn’t be more fitting: “What we need is an admission of how little we actually know about how to pass safely through the next few decades, the courage to examine a wide range of alternative programs, and, most of all, a dedication not to dogma but to solutions.” History shows that housing bubbles eventually burst, and when that happens, the whole country will suffer the consequences.
Image courtesy of The Guardian.