Every time I visit Beijing, I get the feeling that the city’s housing bubble becomes bigger. Unlike the Chinese GDP growth rate, there is no sign of a slowdown in the housing market. What causes the rapid price rise and who benefits the most from the housing frenzy?

China’s housing bubble

Some people will surely argue that there is no such thing as a housing bubble in China because the fundamental demand for housing is very strong. However, there is no doubt that affordable housing is increasingly beyond ordinary people’s reach, especially in first-tier Chinese cities like Beijing.

According to a property affordability index composed by NUMBEO, it takes an average person 48.13 years of income to buy a property in Beijing. The list is followed by Shanghai (42.84 years), Hong Kong (41.08 years), and Shenzhen (40.29 years). Guangzhou’s housing is slightly more affordable and it takes about 20.91 years of an average person’s income, provided the person doesn’t spend money on anything else.

By comparison in Sydney, the most expensive city in Australia and where I live, it takes 11.14 years of an average person’s salary to buy an apartment. So make your guess, either the apartments in Sydney are too cheap, or the apartments in Beijing are too expensive.

Who is to blame?

So who should we blame for the expensive housing in China? Some people may eagerly point their fingers at real estate developers. Surely those developers must be making huge gains from a runway housing pricing, so they must be the ones benefited the most.

Are those real estate developers the ultimate villain? I don’t think so, and this is because developers in China don’t own any land.

In fact, no one is allowed to own any land in China excect the government. So when the population increased in the cities, to build more apartments, a developer has to rent the land from the government. However, good land is often in short supply, and the developer may have to build their apartments on less favourable land, where it has to build additional facilities like shops, roads and parks to attract potential buyers. This could increase the cost of the project, and hence cause the apartment’s price to rise.

On the other hand, if a developer is lucky enough to secure the usage of a good piece of land, it might have pay a hefty price to outbid the competition. Also, the land may already have dwellings on it, and the developer may have to pay additional relocation fee for the existing residents, which in turn raises the cost of the development, generating a higher housing price. So in the end, the real estate developer may not earn a profit as large as people imagine it to be.

The monopoly game

Local governments in first-tier Chinese cities have all tried to cool off their housing markets by implementing strict control over home ownership, but all with limited effect. For them this is a very delicate matter, because they have benefited enormously from land leases fueled by high housing prices. They have much to lose if the bubble bursts.

However, taking the lion’s share from a high housing price at everyone else’s expense may not be a good idea in the long run. The high living cost in first-tier Chinese cities has placed a heavy burden on local firms, and they have to pay higher wages to ensure a good standard of living for their employees, which reduce the firms’ profitability. Hence a high housing price can have a negative effect on those cities’ economic development.