Chinese Tier 1 Cities Housing Becoming Unaffordable

Chinese Tier 1 Cities Housing Becoming UnaffordableDespite the Government’s three-year campaign to tackle sky high property price, only minor corrections have been seen so far. During the past decade average home prices in China have surged over 4.4 times, with some big cities such as Beijing and Shanghai have long exceeded this level. Rising home price alone is still manageable so long as the general public can afford it, but recent research suggest otherwise, pointing out that housing costs in some Chinese big cities have already risen to alarming levels that are beyond reach of most of the lower-and middle income households.

According to a research report from the International Monetary Fund (IMF) last month, 7 out of 10 of the world’s least affordable cities are in China, namely Beijing, Shanghai, Shenzhen, Hong Kong, Tianjin, Guangzhou and Chongqing. Only three foreign cities are on the list, namely Tokyo, Sydney and London, ranking number 6, 7 and 9 places respectively.

The ratios for Chinese cities and Tokyo are the price of a 70 square meters home divided by average annual pretax household income; and ratios for the rest of the cities are calculated as the median home price divided by median pretax household income.

The resulting calculations show that a household in Shanghai would have to save 15.9 years of its annual income without any consumption for buying a standard (70 square meters) flat, following with 12.7 years in Shenzhen, 12.6 years in Hong Kong and 10.3 years in Tianjin. But Beijing is on the top of the list, where it would take a family nearly a quarter-century of earnings to buy an average home in the City – meaning people are handing in almost half of their lifespan earnings for housing.

By comparison, home prices are way more affordable in other cities and homebuyers are paying significantly less of their income than buyers in China. For instance, a typical family in London on average spends 6.9 times of its annual income on its home. In New York, the most populous city in the United States, home price on average equals to 6.2 years’ worth of median pretax household income.

Even from the historical perspective, home prices in China are still more costly compared with Japan in 1990s and United States in 2000s. The home-price-to-annual-income ratios peaked at about 5 to 6 times in the United States and about 15 times in Japan when their housing bubbles burst in 1990 and 2006, respectively.

The affordability issue in China has not only prompted a growing chorus of discontent but also raised concerns over the sustainability of the property booms or even the future economic growth. The rapid urbanization in recent years may just worsen the situation. The United Nations pointed out that urban population increased by over 20 million every year in the past decade, and another 20 million people are likely to migrate to big cities each year in the coming decade. The increase in population is likely to further drive up both the housing and investment demands in big cities, leading to even more expensive and less affordable home prices for those newly arrived immigrants.