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1 Preview for Readings Neo-liberal Housing Market? Housing Reform Policies after 1998 The Evolution of the Mortgage Markets The Framework of Housing Finance System The Lending of Mortgage Market Discussion on Housing Market Monetary Policy and Housing Prices Conclusions 2 Preview Yongheng Deng and Peng Fei. The emerging mortgage markets in China. In Danny Ben-Shahar, Charles Ka Yui Leung, and Seow Eng Ong. Eds., Mortgage Markets Worldwide. Blackwell. 2008. 1-33. Perry Wong and Diehang Zheng. Financial instability’s lending and real estate property prices in China. In J.R. Barth et al. eds., China’s Emerging Markets. 2009. 475493. 3 Ya Ping Wang, Lei Shao, Alan Murie and Jianhua Cheng, The Maturation of the Neo-liberal Housing Market in Urban China, Housing Studies, vol.27, No.3, 343-359, April 2012. Mark Stephens, Locating Chinese Urban Housing Policy in an International Context, Urban Studies, 47 (14) 2965-2982, December 2010. Qiang Li, Satish Chand, House Prices and Market Fundamentals in Urban China, Habitat International, 40 (2013), 148-153. Xiaoqing Eleanor Xu and Tao Chen, The Effect of Monetary Policy on Real Estate Price Growth in China, Pacific-Basin Finance Journal, 20 (2012), 62-77. 4 1. Neo-liberal Housing Market? Neo-liberalism has dominated policy formulation and implementation for three decades and been infuential in reshaping urban housing provision in different countries. Neo-liberal approaches have involved reduced state intervention in social and economic affairs and the assertion of the superiority of market processes. Accounts of this neo-liberal housing policy refer to privatization, increased rents, reduced subsidy, deregulation of private housing and mortgage lending and weakening of planning controls for new and existing housing. 5 A Discussion of Policy Outputs How liberalization of markets has affected investment and ownership of housing and patterns of access and residence. It is said that neo-liberalism captured some basic features of market reform in China. What is new-liberalism? 6 Discussion on Ideal Type Neo-liberalism First, the individual is the normative center of a society and should be as unencumbered by rules and collective responsibilities as possible. Second, the market is the most effective means through which individuals can maximize their own utility functions. Third, state actions that interfere with either individual autonomy or market relations lead to autocratic society, regardless of their intentions. In China neo-liberal reforms have been modified a period of economic turbulence. 7 2. Housing Reform Policies after 1998 Policy aimed to create a diversified provision system with three distinctive types of housing. Government subsidized social rental housing; Government supported affordable housing; Commercial housing. In two decades China had changed from being a nation renting from state owned enterprises or other state organizations to become a nation of homeowners. Discussion! 8 Major Features for Housing Reform The Asian financial crisis and the housing market from 1998 to 2002. By 2002, urban housing development had helped China to successfully avoid serious negative impacts from the Asian financial crisis. The real estate industry emerged as a key economic sector. Most of the policies were in fact creating necessary financial environment and institutions for market functioning. 9 Investment in Real Estate Sector 2003 2008 2009 2010 2013 2014 Total Fixed –Asset Investment, RMB Trillion Real Estate RE/Total % 4.58 14.87 19.39 24.14 43.58 50.20 1.11 3.59 4.31 5.76 11.14 24.24 24.15 22.24 23.87 25.56 10 Investment in Real Estate, RMB Trillion Investment in Real Estate 12 10 8 6 4 2 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Investment in Real Estate 11 Discussion on Housing Demand Conditions in the urban housing market had changed substantially by 2002. Urban population; Income rising: there were large increases in the salaries of mainstream urban residents; Unequal income distribution; Others Discussion! 12 Population and Urbanization The Chinese population is expected to grow by some 14 percent between 2000 and 2030, compared with 40 percent among the developing countries as a whole. China is continuing to urbanize rapidly, with the proportion of the population living in urban areas expected to rise from 36 percent to 61 percent in 2030. So, continued urbanization in China and other developing countries is based on urban population growth. What policies have been designed to accelerate china’s residential housing markets? 13 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Population Composition by Residence 80 70 60 50 40 30 20 10 0 Urban Rural 14 Discussion on Slums and Shanties A growing slum and even shanty towns for many developing countries, especially in their large cities. China has been identified as the only large country, so far, to urbanize without the creation of large slum areas or informal settlements. What can we find some real reasons from their policy package to it? 15 House Price Inflation Faced with a property market price increases and complaints from middle to low-income urban residents, the government has intensified its macro-economic adjustment program since 2005. Clearly, these policies relied essentially on political, administrative and land use planning measures, and their effects were limited and finally failed. Further discussion on initial policies and followed adjustment policies. 16 Average Selling Price, Yuan/sq.m 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Residential buildings High-grade Apt. 17 The selling areas of high-end residential housing accounted for 5% of total residential housing sale, 4% for affordable residential housing sale with remaining 91% being sale of normal residential housing. New issues on China’s house quality and its implication for the demand of higher-end houses. 18 Discussion on House Prices Along with the reform process, both economic prosperity and rapid urbanization have boosted the demand for housing. How much of the real appreciation in house prices can be explained by market fundamentals? What are the most important factors in determining housing prices in each province? 19 Explanation on Housing Prices The economic fundamentals: impending marriages? Disposable income, user cost and construction costs…… The provincial distribution of different level of housing prices is related to the local economic conditions with more developed provinces experiencing higher price levels. Besides, housing prices in more developed provinces are determined by the supply factors including construction costs and land prices, while prices in other provinces are determined by both the demand and supply factors. 20 A special case of the global credit crunch in 2008/2009. Despite these policy efforts, house price rose between 2009-2013 in many cities. Why? What is “structural problems” of the real estate market? Many policies have been issued, these rules were seen as tough, but did not stop house price inflation, Why? 21 Discussion on housing market regulation policy Neo-liberal policies; The policy direction for central government; Incentives for local municipal governments that were more interested in promoting commercial housing development. 22 What is the major factor of China’s land system in the support of local house development? The Chinese housing market represents a distinctive, emerging and maturing market. Is it a good judgment? 23 Housing Price Bubble or Not? In a competitive market, housing supply increases with price and decreases with vacancy rate. When the market follows adaptive expectation, i.e. expects a slow change in price, it is the lagged price, rather than current price, that is used to determine the demand and supply. 24 Policy Problem in China Vacancy rate does not serve as the theoretically significant guidance in many Chinese real estate markets, which is typically represented by a lengthy mismatch between higher-end housing demand and supply. Domestic investment activities and resource allocation are highly influenced by government policy. 25 3. The Evolution of the Mortgage Markets The emergence and rapidly mortgage market in China has become a powerful financial engine for booming housing development and sustained economic growth since the turn of century. The development of the residential mortgage market in China has been a strategic element of the household-ownership oriented housing reform orchestrated by the central government of China. The emergence of residential mortgage-lending has made the mortgage market the dominant growth stimulus for the Chinese banking industry. 26 Major Reform Steps Between 1949 and the mid-1980s, a residential mortgage system was non-existent in the sector of urban residential housing. In the 1988 Constitutional Amendment, although the government still retained the ultimate ownership of urban lands, it permitted individuals to purchase the right of use land for urban residential purpose up 70 years. 27 The private-owned residential units began to emerge in China, but the development of the commodity housing sector had a slow start. In the 1990s, China issued a series of housing reform measures and policies to accelerate the development of housing markets. 28 Private developers were allowed to develop residential housing projects and the housing stock was sold to tenants at belowmarket prices. To enhance the liquidity of the housing market, the secondary housing market was also founded. 29 Outstanding Balance of Mortgage Loans (billion Yuan), 2003-2012 Households HH/GDP RED RED/GDP Land De. LD/GDP 2003 1177.9 2004 1592.2 9.96 780.0 4.88 2005 1843.0 9.97 914.1 4.94 2006 2250.6 10.40 1410.0 6.52 2007 2696.8 10.15 1800.0 6.87 2008 2980.0 9.49 1930.0 6.15 2009 4760.0 13.96 1860.0 5.46 667.8 1.96 2010 6200.0 15.44 2300.0 5.73 832.6 2.07 2011 7140.0 15.10 2720.0 5.75 768.0 1.62 2012 7500.0 14.45 3000.0 5.78 863.0 1.66 HH: households; RED: Real estate developers; LD: Land developers. 30 Outstanding Mortgage Loans to GDP 18 16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 Household Loans/GDP 2008 2009 2010 2011 2012 Real Estate Loans/GDP 31 The housing reform has created residential mortgage lending business, propelled the development of China’s mortgage market from its negligible status in 1997 to more than Yuan 23.1 trillion (US$ 3.76 billion) by 2014, made China the largest mortgage market in Asia. China’s mortgage lending accounts for 36% of GDP in 2014, which is low compared to 65% for Singapore, 50% for Hong Kong, and 58% for the US in 2002. Comparative studies in international experience. 32 Mortgage Lending The emergence of residential mortgage-lending has made the mortgage market the dominant growth stimulus for the Chinese banking industry: US$ 200 billion in 2004 and US$ 3760 billion in 2014. It has been a typical case for rapidly growing mortgage lending market since 1998 in China. 33 Outstanding Balance of mortgage Loans in China, Yuan billion Mortgage loans Annual growth Annual growth rate Mortgage as % of bank loans Mortgage as % of GDP 1998 43 30 124.2% 0.5% 0.5% 2004 1800 470 35% 10.1% 13.2% 2014 23100 3300 16.6% 28.7% 36.3% 34 The Housing Provident Funds (HPFs) The Housing Provident Funds (HPFs) modelled on Singapore’s Mandatory Provident Funds. The State Council issued the Ordinance of Provident Housing in March 1999. The establishment of HPFs marked the beginning of the residential-housing financial system in China. A real role of the HPFs to China’s residential housing market. 35 Residential Mortgage Lending In 1998, the central government accelerated housing reform by undertaking a series of major reforms in the housing finance system. The PBC issued the Regulation on Residential Mortgage Lending. The housing reform has set up a private property market in China through the privatization of the stateowned housing system and the recognition of private property ownership, which in turn speeded up private capital formation and private wealth accumulation. 36 4. The Framework of Housing Finance System in China A dual channel housing finance system The system is operated through both the policy-driven housing finance channel and the market-driven housing finance channel. The policy-driven housing finance is mainly through HPFs, which are mandatory housing savings scheme, while the market-oriented housing finance is characterized by commercial loans from banks. 37 38 The Features of the HPF The HPF in China is mandatory housing savings scheme. All employees in the urban areas are required to contribute a certain portion of their salary to the scheme and employers are required to match the contribution. The contribution is deposited monthly by the employer into a special HPF account for each employee at a commercial bank. The account will be closed only if the account holder has left the city, retired or deceased. 39 HPFs Operation in Shanghai billion Yuan HPF Collections HPF Drawing Households loans of HPFs 2001 9.30 4.97 10.46 2002 10.94 6.30 11.96 2003 14.11 8.38 11.43 2004 15.93 9.72 10.48 2005 19.93 11.51 8.97 2006 20.45 12.58 18.63 2007 23.19 14.74 28.79 2008 28.25 16.34 19.88 2009 33.78 18.88 56.60 2010 39.04 22.61 30.29 2011 49.90 24.04 26.51 40 HPF Collections and Loans for Households in Shanghai, 2001-2011 60 50 40 30 20 10 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 HPF Collections 2010 2011 Loans for Households 41 Housing Provident Fund Management Centre The centre is under the supervision of the municipal government, which is also responsible for making relevant HPF policies. All cities have their own policies or rules on fund contribution, therefore, the contribution rate varies by city. 42 New development of a supplement account of HPF for some organizations. A new progress case of 2015! 43 5. The Lending of Mortgage Markets Hybrid mortgage Hybrid mortgages that combine the maximum amount of HPF funds and commercial mortgages were rapidly developed by many banks in China. Under the current housing finance system in China, individual homebuyers use both HPF loans and commercial mortgage loans for the purchase of commodity housing units from the market. Loan-to-value (LTV) 44 The Primary Market for Commercial Mortgage Lending In May 1998, The PBC established the basic mortgage lending standards, including a maximum LTV ratio to 70%, and mandatory income verification. PBC also regulated the preferential mortgage interest rate and set the mortgage rate 10 basis below commercial loans with the same term. 45 Today, all mortgages in China are adjustable rate mortgages (ARMs). China’s mortgage market has experienced an unprecedented growth since 2002. Discussion! 46 Types of Mortgage Loans in China Commercial mortgage loans; HPFs mortgage loans; And hybrid mortgage loans, will use both HPFs and a commercial bank’s consumer credit funds as sources of financing. The LTV ratio for business mortgage loans in China will be less than 60%, compared to the residential mortgage loans of 70%. 47 Spread of Interest Rates between HPF loans and Commercial Loans Item Long-Medium Loans 3-5 years More than 5 years 20/10/2010 07/07/2011 5.96 6.90 6.14 7.05 HPF loans Less than 5 years 3.5 4.45 More than 5 years 4.05 4.90 48 Emergence of Secondary Mortgage Market Trading practice; 49 An Early Assessment of China’s Residential mortgage Loans Performance What incentive for most Chinese households to apply for mortgage loans? The borrowers’ motivation for prepayment and default in China are quite different to those observed in the US or other developed countries. Discussion: Can you provide the basic features of mortgage loans performance in your own country? And how can you compare the case of China with other cases? 50 Prepayment Risk Since all mortgage loans issued in China are ARMs without a cap, there are no refinance-driven prepayments reported in Chinese mortgage market. So far the financial ‘ call option’ has virtually no value to Chinese mortgage borrowers. Chinese borrowers are quite sensitive to the increasing of mortgage rates. If the interest rates will be raised, will borrowers pay back before the maturity? Why? 51 Default Risk The number of default cases in China is quite small. There are three major reasons for default in China Mortgage fraud Pre-sale dispute Deterioration of affordability 52 Mortgage Loan Performance Most Chinese households are reluctant to get into debt. The borrowers’ motivations for prepayment and default in China are quite different to those developed countries. Prepayment risk: if the interest rate will be raised, many borrowers will choose to pay off their mortgage loans before the maturity. 53 Pre-sale Disputes In China’s market, there have been increasing reports of homebuyers refusing to pay off their mortgages due to disputes with real estate developers regarding the quality and delivery time of their housing. These cases are mostly related to the presale of residential properties where the developers fail to deliver housing units meeting the presale contracts. Discussion! 54 6. Discussion on Housing Market The amount of housing market has rapidly increased over the past decade. Discussion: the real effectiveness of government policy on housing market price. 55 Sales Revenue from Commercial Houses, billion Yuan,1998-2013 Sales Revenue 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Sales Revenue 56 Sales of Commercial Houses, Million Sq. m Sales of Commercial houses 1400 1200 1000 800 600 400 200 0 Sales of Commercial houses 57 Sales Revenue/GDP Ratios Sales Revenue/GDP 16 14 12 10 8 6 4 2 0 Sales Revenue/GDP 58 Un-precedent Growth Sales Revenue, RMB Billion Sales of Houses, Million Sq.m Sales /GDP ratio, % 1998 2004 2013 251.33 1037.57 8142.83 121.85 2.98 382.32 6.49 1305.51 14.32 59 Discussion How can we rightly draw lessons from this episode of un-precedent growth of house sales between 1998-2013? Will China’s households keep their strong demand for residential properties in the coming 15 years? 60 7. Monetary Policy and Housing Prices A strong relationship between bank lending and asset price inflation. Xiaoqing Eleanor Xu and Tao Chen, The Effect of monetary Policy on Real Estate Price Growth in China, Pacific-Basin Finance Journal, 20 (2012), 62-77. Yanbing Zhang, Xiuping Hua and Liang Zhao. “Monetary policy and housing prices: a case study of Chinese experience in 1999-2010.” Bank of Finland, Institute for Economies in Transition. BOFIT Discussion Papers 17/2011. 61 Investment Theory To enhance portfolio return and achieve diversification, global investors have long been seeking opportunities in emerging real estate markets since 1990s. Although international stocks, bonds and private equity have gained much more visibility, international real estate has played a significant role in long-term international investment. Real estate as a special asset for investment. 62 Bubble Price for Residential Home In China, residential home price in major cities is typically more than 30 times the average household annual income, making mortgage loans essential for most home purchases. In addition, real estate development companies often rely on bank loans to support their project development due to large funding needs and illiquid nature of their investments. A comparison to home price based on the average household annual income. 63 The Goals of Monetary Policy The goals of monetary policy in China are to maintain the stability of currency value and foster economic growth. Although home price is not included in the inflation measure, healthy development of the real estate market with stable price growth is indirectly linked to the general goals of China’s monetary policy. The central bank uses the following four major tools: interest rate policy, reserve requirements, open market operation, and credit policy through window guidance. 64 Money Supply M0: currency in circulation; M1: M0 + demand deposits; M2: M1 + savings deposits and money market deposit accounts. It is worth noting that China’s monetary policy target is the growth rate of money supply, unlike the targeting of federal funds rate in U.S. 65 Effects of Money Supply on Home Price The growth of money supply may affect real estate price growth indirectly through two channels: First, a change in the growth of money supply will affect the loan-making ability of commercial banks, thus affecting the loans made to the real estate sector as well; Second, an increase in the growth of money supply will affect the public’s inflationary expectation and the demand for non-monetary assets such as real estate, thus affecting the real estate price growth indirectly. 66 Growth Rates for M1 and M2 35 30 25 20 15 10 5 0 M1 M2 67 From September 2008 to December 2009: extraordinary expansionary monetary policy to cope with the global financial crisis. From January 2010: tightening monetary policy to control the real estate bubble. What is the next policy for the real estate market? 68 Credit Policy Credit policy is made by the central bank to direct financial institutions’ credit size and structure according to macroeconomic policy, industrial policy and regional development policy. The PBC frequently revised its real estate credit policy by changing mortgage minimum down payment for regular first home, large first home and second home, and issued window guidance to effectively expand or restrict the supply of bank credit to the real estate sector. Liquidity for housing price growth! 69 Bank Loans, Yuan Trillion Bank Loans 12 10 8 6 4 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Bank Loans 70 Interest Rate Policy Since the bank rates in china are still guided by the PBC, the interest rate policy can be used as a monetary policy tool. It includes two categories: one is to adjust benchmark interest rates offered by the central bank, including re-loan rate, and reserve balance rates; the other is to adjust the benchmark interest rates on financial institutions’ deposits and loans and set the floating range. The mortgage rates are generally according to the longterm benchmark bank loan rates set by the PBC. This is an important monetary policy tool to affect the real estate home price growth. 71 One-Year Deposit and Loan Rates 12 10 8 6 4 2 0 Deposti Rate Loan Rate 72 Some Findings It is demonstrated that declining interest rates, faster money supply growth and loosening mortgage down payment policy tend to accelerate the subsequent home price growth, while rising interest rates, slower money supply growth and tightening mortgage down payment policy tend to decelerate the subsequent home price growth. Hot money flow does not have significant impact on home price growth beyond its impact on the money supply growth. Stock market return is shown to have a significantly positive effect on the home price growth. 73 8. Conclusions The residential mortgage market in China is a newly emerging sector of the capital market. It is evolving rapidly with the swift housing system reform recently carried out in China. The fast growth and the accelerating importance of the residential mortgage sector becomes a financial engine for the booming residential housing development and sustained economic growth in China. Changes of policy have proved to be one of the critical determinant in mortgage payment mode. 74 Questions Has new-liberal reform played a significant role in China’s housing market development? What are the fundamentals in China’s urban housing price growth? What policies have been designed to accelerate China’s residential housing market? How much of the real appreciation in house prices can be explained by market fundamentals? 75 What are the most important factors in determining housing prices in major cities? What is “structural problems” of the real estate market? Many policies have been issued, these rules were seen as tough, but did not stop house price inflation, Why? What is the major factor of China’s land system in the support of local house development? 76 The Chinese housing market represents a distinctive, emerging and maturing market. Is it a good judgment? Can you provide the basic features of mortgage loans performance in your own country? And how can you compare the case of China with other cases? If the interest rates will be raised, will borrowers pay back before the maturity? Why? 77 Further Readings Borio, C. and Lower, P. 2002. “Asset prices, financial and monetary stability: exploring the nexus.” BIS Working Paper No. 114. July 2002. Quigley, J.M. 1999. “Real estate prices and economic cycles.” International Real Estate Review. 2(1). 1-20. Hofmann. B. 2001. “The determinants of private sector credit in industrialized countries: do property prices matter?” BIS Working Paper No. 108. 78 Liang Q., and Cao H., 2007. “Property prices and bank lending in China.” Journal of Asian Economics. 18.63-75. Iacoviello, M., 2005. “House prices, borrowing constraints, and monetary policy in the business cycle.” American Economic Review. 95. 739-764. Yanbing Zhang, Xiuping Hua and Liang Zhao. “Monetary policy and housing prices: a case study of Chinese experience in 1999-2010.” Bank of Finland, Institute for Economies in Transition. BOFIT Discussion Papers 17/2011. 79 Thanks! 80