East Asia and the Pacific

China

Country Profile

China’s urban population has quickly grown from 16 percent in 1960 to 44 percent of total population in 2009. During that year, the urban population grew by 2.58 percent, while the total population grew by only 0.51 percent.[1] Before 1988, China’s housing system was primarily centrally planned, and housing was regarded as a component of social welfare. In order to address the lack of incentive for housing improvement under the central planning system, the government introduced a major housing reform in 1988. After several policy changes in subsequent years, 1998 marked the turning point as the government announced the plan for completely ending the old allocation system of housing. As a result, home ownership climbed sharply to 82.3 percent in 2007.[2] China’s total outstanding residential mortgage loans amounted to USD $227 billion in 2006, accounting for 10 percent of China’s GDP.[3]

The funding for China’s housing finance market comes from two main sources: commercial banks and the Housing Provident Fund (HPF). In 2007, more than 80 percent of the mortgage loans were provided by commercial banks, of which 90 percent were state-owned.[4] The maximum LTV ratio is currently set at 80 percent for the first home, and is typically lower for the purchase of a second home depending on local policies. The maximum mortgage term can go up to 30 years, but the typical term is about 10 to 15 years.[5] The People’s Bank of China sets the mortgage rate that applies to all borrowers. As borrowers are sensitive to rate adjustments, the government uses the rate as a tool to monitor the market. In 2008, the annual interest rate for 20-year loans was 5.58[6] percent and total originations were USD $252 billion.[7]

China’s HPF system is modeled after Singapore’s Central Provident Fund. Administered by the China Construction Bank, HPF is a housing saving program in which employees contribute a certain percentage of their monthly salaries. Membership was mandatory initially only for employees in public sectors, which has been extended to private sectors since 2005. Although the HPF program covered about 60 percent of salaried workers in urban areas in 2006, the participation rate varied across cities.[8] Typically, more developed cities have higher participation rates than less developed cities. The contribution ratio also varies, as employees in more developed areas contribute around 10 percent to the fund, while those in less developed inland areas contribute around 5 percent.[9] Deposits made to HPF can be withdrawn only under certain circumstances, including retirement and home purchases. In return, employees have access to low-interest-rate mortgage loans from HPF, typically lower than 4 percent.[10] By the end of 2007, outstanding HPF loans reached USD $62 billion, about 20 percent of the total commercial mortgage loan originations.[11] The size of each HPF loan is restricted by local policies and is typically insufficient to cover the home purchase. Therefore, many home purchasers borrow from both HPF and commercial banks.

Despite the high home ownership rate, the shortage of affordable housing has become an increasing social concern in China. In 2007, home price to income ratio exceeded 20.0 in ten major Chinese cities, with Xiamen being the highest at 27.0. In comparison, San Francisco has a price to income ratio at 8.0, the highest in the United States.[12]

The government has been actively intervening in the market to make housing more affordable. Local governments in some cities have temporarily forbidden second home purchases, while others have tightened mortgage policies. The central government launched the Economical and Comfortable Housing (ECH) program in 1994. All ECH units are developed for sale, and most of them are built by for-profit real estate developers. Local governments provide free or low-cost land to developers and regulate the sale price to keep the profit margin lower than 3 percent. The prices of ECH units are typically 15 percent to 20 percent lower than market prices.[13] From 1994 to 2009, the program delivered more than 12 million units of subsidized housing.[14] In order to further enhance housing affordability, in a five-year plan for 2011-2015, the central government plans to invest USD $197 billion to build 10 million subsidized homes in 2011 and 36 million units over the next five years.[15]