Chinese Real Estate and Housing Reform

Chinese Real Estate and Housing Economic Reform

Development of China Housing sector was an important part of Chinese Economic Reform as a part of a transformation from socialist system into more market oriented economy.

Housing is basic needs that effect social and economic structure and is key element of economic and social affair accounted for 10-20 percent of total economic activity and 20 to 50 percent of reproducible wealth.1 The development of Housing Sector also has a linkage to interest, savings, and inflation rates, unemployment, wage rates and balance of payment.

China's Housing System reform reflected Chinese Economic reform in many periods. It demonstrated development of centralization in Socialist Economy towards Market driven Economy and the role of SOE and private sector in during the development. It is also the background of current real estate industry in China.

China's Housing System Reform

China's housing system reform can be categorized into four stages 4 which are Welfare Allocation Period from 1949 to 1978 when the housing system in China was purely based on traditional welfare system, the Experiment period during 1978 to 1987 when the problem of traditional welfare system started to show up and the government start to experiment some actions differently from the traditional system, the Comprehensive Reform period from 1988 to 1998 when the government launched many policies to change the Housing System to be more market-driven and the last period, the Nurturing and Establishing a Fully-Function Housing Market period (After 1998) when the government stopped providing public housing.

1. Welfare Allocation Period (1949-1978)

The traditional housing system during in this period was highly centralized. Most of the housing system were built and owned by government or work unit. Land in urban area was owned by state and land transactions were forbidden after 1949.

The central government planned on housing investment and supply. Housing investment funds came from government budget expenditure and was allocated to local government, various State-Own Enterprises and work units (Dan Wei) to build urban rental unit. Through income distribution policy, employees, government offices and SOE received allocation from their work-unit for nominal rent 1

The nominal amount of housing rent for compensating depreciation, routine maintenance and management of public housing were collected from worker wages. However, this amount of rent was not enough to support construction expenditure and needed heavy subsidization from central government. 1 The rent amount normally deducted from worker wages was accounted as one to three percent of worker total income. 2 This made housing investment became non productive comparing to other capital investment as it was one-way capital flow draining state resources of the government. 1

Nevertheless, the housing allocation was not equal. The chance of obtaining housing for an individual depended on one's work unit, rank years of service, family size and existing living area. This inequality caused unfairness and corruption in distribution process and bad attitudes towards housing consumption. 4

2. Experiment Period (1978-1987)

Even though the welfare housing system worked well during early stage, the problem came when the urban population grew very fast during the Economic development. The demand for housing grew faster than the ability of the State to supply. One of the reason of incapability to fulfill the housing demand of the government during this stage came from the its limited resources to invest in new housing. But another reason also came from a too centralized planning system fully controlled by the government which caused no market function to fulfill need of population.

After the shortage of housing became extreme and when the nominal rent could not cover the cost of maintenance and management of the system, the welfare housing system became a burden of the government and a critcal problem that effect nation's production, stability and relationship between Party and the people. 2

To solve this problem, the government adopted the concept of socialist market economy into the housing system and started to reform housing system in some cities. For example, the increase of the rent or the selling of publicly-owned housing to individuals at subsidized price. 4

3. Comprehensive Reform Period (1988-1998)

In this