Deng Yongheng on China's Real Estate Market

Deng Yongheng, Professor of Real Estate and Finance, Director, Institute of Real Estate Studies at the National University of Singapore discusses China's real estate market.

1. You study the impact of population, marriage and real estate market, and pointed out that the housing boom since the marriage, triggered by the impact of the population has a significant cyclical characteristics [1]. According to 24-year lag, the time point of the change or China in 2014-2015. Such a change would make the real estate market, what kind of impact?

The last century, the United States has a controversial thesis, it is to study the impact of demographic changes on the real estate market. This paper by the economist N. Gregory Mankiw (Gregory Mankiw) and David N. Weil (David Weir) [2] co-authored, their model is very simple, the left is the price, the right of the population of age, and then do regression. Taking into account the trend of aging American baby boomers, they have US house prices fell sharply each year in 20 years, but the United States has been rising house prices predicted by the model. Real Estate Economic Research scholars believe that this model ignores the many factors that affect the price, such as salary increases, unemployment, of GDP growth, so some scholars have added these factors redo the model. After the economic crisis, the trend of prices seems to predict convergence with the model, so some people to re-focus on this model.

Our model includes multiple factors, such as market regulation, fertility, family planning policy, demographic change and prove RATES significant correlation. In the study of the housing market, we will be an important factor in the population as to fill the gaps in the Chinese real estate research. However, demographic factors are not the only factors that affect the real estate, in the analysis of the entire real estate market, the need to consider important risk factors, macroeconomic policy, wage growth and so on. This paper is actually complement the demographic factors previously estate research literature neglected.

In addition to consumption, investment properties, real estate in China is an important indicator of the social status of the owner and economic strength. As the Asian Development Bank's chief economist Dr. Wei Shangjin in its recent form in the "Political Economy" magazine (Journal ofPolitical Economy) of the paper, now a television dating show the existence of such a phenomenon, male contestants have a home and car, they are winners. There are many mother-in-laws looking to determine if the future son to have the economic strength, to provide a good life for her daughter. Many families in order to allow his son to find a good spouse, will do whatever it takes to buy a house, which constitute the Chinese special intergenerational purchasing power factor. The study of real estate in China, a lot of special factors to consider, but the fundamentals are the same, there is still the risk of real estate investment. Basic indicators such as house prices than the rent, housing income ratio is too high, it shows that the risk is too large, the housing market can continue to rise is a problem.

2. While the 2013 national property market overall downward trend, but generally agreed that the net population inflow has generated just need to support front-line property will rise forever. In recent months, first-tier cities in property transactions but had slipped, this indicates that under the influence of population policy and other multiple factors, the turning point of the Chinese housing market bubble is approaching?

I think the Chinese property market is entering a turning point, but this does not mean that the inflection point of the collapse of the US subprime mortgage crisis, but the real estate market to mature. When the real estate market is mature, more open and more transparent market competition makes early specific real estate development brought huge profits increasingly rare. When Yabuli summit, Mr. Vanke chairman Wang Shi talked about this change, in the future the developer must enhance their operational efficiency, market marketing, research and development capabilities, and the use of the effective functioning of the capital markets and other financial strategies to beat competitors to survive. There are many signs that the Chinese real estate market is gradually turning to established, through this transition, the way real estate management will shift from relying on to fight money into operating and capital markets benefit earnings. This market make the competition more fair and transparent, the normalization of profits. Secondly, I have always stressed to the development of sound domestic financial markets mature real estate, which will also help reduce the risk of the real estate market, to avoid irrational investment.

Rate it that if there is an inflection point? This is also the focus of international media. For example, "The Wall Street Journal," "New York Times" and other media interviews I usually ask: Are you a real estate expert study Chinese, you think the Chinese housing market bubble burst Do you want it? I will respond: you ask is which market, north of Guangzhou-Shenzhen, Chengdu or Chongqing? Regional Differentiation of China real estate market is very significant. Professor Wu Jing with Tsinghua University Real Estate Institute I and Ji Yeke (Joseph Gyourko) Wharton professor co-authored a paper [3], the case study of 35 major cities in China, covering population growth, unemployment rate, industrial development, economic growth and other factors, then use the model to predict future demand for housing. Study found that among the huge differences from city to city, like north of Guangzhou-Shenzhen and other cities mostly in short supply phenomenon, so prices in these cities are high. By supply and demand, demographic factors, the first-tier cities there are many side benefits, such as education resources, infrastructure, etc., which are reflected in the price inside. In addition to some second and third tier cities housing market risk is relatively large, but I think that line the city's housing market appears similar to the US subprime mortgage crisis as the collapse of low probability.

3. Compared with the subprime mortgage crisis in the United States in 2008, Chinese housing bubble, the debt problems of the impact on the capital market?

Then the collapse of the housing market is the United States government over the years, a series of policy-oriented results. The US government had not wanted to get more involved in civic participation in elections vote voting was introduced preferential mortgage policy: guaranteed by the government, provided a down payment of only 3% of the mortgage buyers. Beneficiaries of the policy are mostly low-income people, because of the higher risk of default and are usually difficult to obtain housing loans in the bank. We simulated the dynamic changes in the relationship between economic growth, the rate of down payment and default rates between study additional risk of default of this policy may result. The study found that low down payment once the government introduced preferential mortgage policy, the taxpayer will have to pay huge taxes to pay for the government to set policy. Government's preferential mortgage policy not only resulted in a number of unsustainable short-term needs, and even induce some developers in the Las Vegas desert have built a large mansion , the formation of a market can not bear excess capacity. Second, compared with the United States at the time of high leverage, leverage China's residential housing market is very low. Negative leverage when the US presence, and some even up to 150% mortgage last, these highly leveraged basic will eventually default.

In addition, the US government was highly developed asset securitization market, the lack of effective supervision, the risk of real estate is too concentrated in a few large investment banks shoulder and once on the irreversible collapse. Overall, the Chinese real estate market, regional differences, and lower leverage, lower residential mortgage delinquencies, the main condition occurs as the US subprime crisis does not exist. However, excessive bank lending in the real estate market, it will affect other industries, finance and capital markets; Second, the Chinese local government debt and the real estate market is also closely related to the potential risks of local government debt default would cause great negative on China's economy influences.

4. China's housing market has many distinctive characteristics - its price depends on the support of the vast majority of investors in housing prices is expected. In addition to early just to be available, but a lot of people because there are "north of Guangzhou-Shenzhen always up" expected, select the purchase as an investment. How do you think this expectation?

By housing cost model, we are China's major cities high prices phenomenon were analyzed and found that people's expectations for house price growth is most critical, and such expectations are generally identified by the survey and data analysis to measure [4]. From a historical point of view, although in the past decade, the average annual growth of the value of many of the housing market are high, but there are some exceptions. Once the market to external shocks, such as the government introduced the restriction order, GDP slowdown, assuming that people's expectations by 1 percentage point, our model predicts equilibrium price is down 30%. Shenzhen, for example, although housing prices in the past year and a half up too quickly, but only the first nine months of house prices and trading volume sync up in recent months, trading volume has been down, but housing prices are still rising. This is actually supporting market expectations, buyers believe that if house prices also rose to next year, we expect to make money to buy a house. But trading volume fell to explain, "there is no market price," no one will buy your house, and you can not cash value of the house through the capital market, this time for investors to purchase investment risk will be enormous. And GDP, import and export, the disposable income of these different fixed target, is expected confidence in the market, it is vulnerable to being so. If house prices are now down yet, it may be that people are still waiting to see, soon expected to change policy direction favorable to investors.

5. You mentioned several times in the development of real estate financial markets, encourage asset securitization. In the case of the real estate industry transformation and upgrading of China's real estate capital markets should be how to develop it? United States, Singapore's experience to the desirability of?

Many people think that the subprime crisis was caused by the asset securitization, asset securitization also accused the media is the culprit, but in fact asset securitization itself is just a tool of government policy mistakes and the absence of market regulation is the ultimate reasons for the outbreak of crisis . When I teach classes to the Chinese mayor comes to the United States despite a high degree of asset securitization, followed by the mortgage crisis spread like influenza viruses worldwide at the National University of Singapore, the US housing market quickly out of the shadow of the crisis. But affected some other countries of the world, since real estate is not so well-developed financial capital market system, still shrouded in crisis under. I think China under effective supervision, and better able to grasp the risks, the introduction of asset securitization steadily promote the development of real estate finance market has become essential. Because the Chinese people's investment channels over a single, the stock market can not touch the money in the bank and not run to win inflation , which forced most families have no choice in the premise of the entire life savings are pressed against the purchase of investment. However, since the housing market can be highly rewarding, naturally accompanied by huge risks. We did a simple calculation, according to the local average income and average housing area to count, Beijing monthly mortgage income ratio exceeds 90%, 60% higher than Shanghai, and Shenzhen is as high as 100%. Many families to buy a house and became slaves, their savings, their children's education expenses, medical insurance, pension pressure in housing market, for this is not conducive to social harmony and stability.

Many houses first-tier cities last year rose by two to three million, but this is worth on paper, had not materialized. The real estate finance and capital markets of the United States have developed secondary mortgage real estate value to cash (Cash-out Refinancing) policy. After housing prices, investors can get a mortgage bank will do before the second mortgage, the cash value of the property. China can not do it, then housing prices still have a mortgage, house slaves finally, this is the result of real estate financial markets are underdeveloped. Singapore's real estate capital markets is also very developed, mainly real estate asset trust (Real Estate Investment Trust, REITs) market in June this year we plan to hold high-level forum related topics in Shanghai, it intends to take advantage of academic platform to enhance the academic, industry and government cognitive this topic, and effectively promote the process of asset securitization in China. I guess the last couple of years, China's asset securitization, especially with the real estate market-related capital market will have great development, which would be advantageous for the people.

6. China in the past regulation of real estate, mainly through administrative means lending rate, down payment, taxes and other economic instruments and the purchase and so on. These policies have increased the difficulty of the purchase, but also push demand delayed, delayed demand will still come, and to provide support for house prices. From international experience, government regulation and control policy on the housing market should be how to develop it?

In recent years, China has promulgated a number of sets of "cool down" policy, the effectiveness of these policies we have done tracking. The study found the number of the housing market, the "cool" policy introduced after six months, there have been more than half of the rebound, leading to the market price becomes higher. Target China policy usually short, often it is regulated by administrative means, not a long-term policy framework. In contrast, the Singapore government's macro-control policies on the housing market relatively targeted. Singapore to develop the housing market regulation policy would take into account the people's housing affordability, through coordination between the government departments to achieve "improve the quality of housing, lower housing costs," the goal. For example, Singapore has 80% of the houses belonging to the Government to develop housing estates, only 10% of higher-end private housing. Singapore government uses repeatedly raised the stamp duty on property transactions the way to achieving progressively the effective control of its owners the market was overheated, attracting excessive speculative investment issues. China's policies often also exist "one size fits all" problem. Second-tier housing market oversupply, the country has introduced a non-discriminatory "to stock" policy, leading to the first-line real estate market overheating. Actually, that's a lot of international media asked "whether the Chinese housing market will collapse," made the same mistake.

7. Chinese local government financial dependence on the land grow year by year. Comments saying, "life estate leather, leather is the local government's life", you think how to solve this dilemma?

Zhu government period after the introduction of the tax system, local government finances were turned over most of the central and local governments in many little income left. However, the central government for local government funds often can not meet the needs of local construction and development, the construction of many places still rely on local financial support. Unlike the US, Chinese local governments can not issue bonds to borrow money from the bank and there are many restrictions. Local governments will land as collateral to obtain funds needed local construction and development through land finance. Thus, the higher the price of land, the better for local finance. A few years ago, we did a study and found that the local government during the term of their GDP for investment in environmental protection performance and construction, and local governments have a high correlation between the assessment [5]. By examining 283 prefecture-level city mayor, party secretary for 10 years of promotion, the study found that the probability of promotion mayor and party secretary of the great positive correlation with GDP growth performance during their tenure, while GDP growth but also by the real estate boom It pulls. Conversely, if the money into infrastructure construction and other aspects of the green, then the probability of promotion will be greatly reduced. Because the assessment mainly to see the GDP indicator, while the development of green facilities generally 10--15 years to return, but the mayor, party secretary general in 2035 for a change, is now ready for green construction so let 'descendants cool. " Therefore, the examination system, the Chinese government financing limitations, making the local government had to rely on land finance.

However, the local government to get through this single financing platform loans from banks at once as collateral land market value fluctuations, and financing the development of public facilities and moment can not generate cash flow, then the local government land financial aid cast of local government financing platform is bound to increase the risk of default, and ultimately have a negative impact on the national economy. Thus, a single land finance is unlikely to be a sustainable local government financing platforms, to focus on the development of asset securitization and capital markets, such as multiple financing channels.

8. China also involves the issue of housing residential land use rights, some sensitive buyers has issued a "70 years later, we are homeless in their own land," the doubts. 70 years after the expiration of usage rights will face what kind of problem?

China's land is leased properties, the highest residential land use period of 70 years. After the expiry of the use, the building still belongs to the owners of all the earth, but the owners must re-sign the lease and pay the fee. Accordingly, the buyers who made ​​commercial usage rights can only be built on the land on the basis of residual service life. If the date of the transfer of land use rights and the date of the sale of real estate developers have a longer time interval, buyers will inevitably face significant "property ownership Term shrink." In developed real estate market, real estate transaction the parties will usually be reflected in the residual value of the land price. For example, the right to use land in Singapore is generally 99 years and 999 years, 99 years of land use rights equivalent to lease properties. However, the Singapore government in the transfer of land to developers or redeveloped, normally ask them to recharge (top-up) land use rights to 99 years, and developers will be reflected in the costs associated with the price. This is a relatively smooth over the whole market in a given year is not all the land is concentrated maturity, while the number of cases the upcoming Chinese land lease expire simultaneously. By then, both the government requires homeowners to pay the land transfer , or let "the taxpayer", the housing market will have a great impact, but also may lead to relevant policies whether "fairness" of the controversy. Thus, the process of land lease period expires only reasonable design issues related to economic policy, but also consider the social issues involved. Government, academics and industry should be fully prepared for this.