Sky-high condo prices fueling social inequality in China
All but the wealthy being frozen out of the urban real estate market
Nikkei Asian Review
Hiroshi Murayama, Nikkei senior staff writer
17 December 2016

A man rides an electric bike, carrying children near apartment blocks in Beijing on Nov. 29. Reuters

TOKYO -- Condominium prices are soaring in Beijing and Shanghai, making it virtually impossible for people without substantial funds or assets to obtain housing. Wealthier people, meanwhile, are enthusiastically snapping up residential units, adding momentum to the price rises.

China could be shaken by another "revolution" if the gap between haves and have-nots remains unresolved. The Chinese government is considering introducing a fixed asset tax to address the problem.

steep increase in the number of divorces

A steep increase in the number of divorces drew strong news media attention in Shanghai this summer. Pictures of long lines of couples awaiting divorce procedures appeared in the news.

The sudden boom in divorces was related to the policy of raising the ratio of down payment when a household buys a second or third condo. To circumvent the rule, married couples often resort to bogus divorces.

Rumors circulated that measures to prevent bogus divorces will be toughened, and couples planning to buy second or more condos hastily filed for divorce.

In Chinese cities, most people live in condos

In Chinese cities, most people live in condos, and buying additional units is a popular topic of conversation. Many owners of multiple condos are government officials and employees of state-run enterprises, who have access to housing units due to their involvement in welfare programs.

A condo can be used as collateral for additional mortgages, enabling the owner to buy more property. This then allows the buyer to build up his or her assets, which permits more purchases with multiple mortgage loans.

"mouse tribe"

Another factor in the news recently is the plight of the so-called "mouse tribe"—poor people living in low-rent basement apartments—in Beijing. Many small, windowless basement rooms have numerous tenants, most of whom are migrant workers from rural villages. There are an estimated one million basement tenants in Beijing alone.

While wealthy people keep increasing their assets, poor people are mired in low wages and disparaged as "rats.", a real estate internet portal, reported that in November, housing prices per square meter averaged 41,292 yuan (about $6,000) in Beijing, 45,847 yuan in Shanghai and 55,040 yuan in Shenzhen.

Data compiled by other real estate companies shows that condos in Beijing and Shanghai are often priced at the 40,000 yuan per square meter level.

Actual floor spaces about 20% smaller

Actual floor spaces in China are typically about 20% smaller than in Japan, because the figures includes balconies and shared spaces. An area of 100 sq. meters in China is thus equivalent to 80 sq. meters in Japan.

sold in a bare-bones format

Condos, furthermore, are sold in a bare-bones format in China. Buyers have to install their own kitchens, bathrooms and other facilities.

According to real estate information provider Tokyo Kantei, newly built condos in Tokyo cost about $600,000 per 70 sq. meters, 11.3 times the average annual income.

Beijing condos: 37 times the average yearly wage

Workers at nonprivate and private businesses in Beijing earned an average of 111,390 yuan and 58,689 yuan, respectively, in 2015. Assuming Chinese workers earn an average 110,000 yuan in annual income, the price of a 100-sq.-meter condo is some 37 times the average yearly wage.

While home buyers in Tokyo struggle with mortgages 10 times their annual income, condo prices in Beijing are nearly 40 times higher than residents' income.

The Gini coefficient is a commonly used measure of inequality in income. Social unrest can be expected when it tops 0.4.

The index is rising in Japan but remains at the 0.3 level. China's National Bureau of Statistics said its index came to 0.462 in 2015. Universities and research institutes reported slightly higher ratios, including those above the risky level of 0.5.

Socialist dilemma
How can one account for such inequality in socialist China?

price of a condo in China does not include land

The purchase price of a condo in China does not include land, because the country has no system for the ownership of land by individuals. As the state owns all land in urban areas, people pay the government for rights to use land when they buy a condo. The rights usually last for 70 years.

Condo buyers thus own only the apartments they live in. The mechanism is similar to Japan's fixed-term leasehold which is not subjected to a fixed asset tax because it is not an asset.

Even if people own one or more condos in neat residential areas or bustling commercial areas where land prices should be high, no tax is levied on them. Wealthy people therefore continue to buy condos and increase their assets without concern about taxation.

There have been calls for correcting the faulty tax system and introducing a fixed asset tax, because this is one method of income redistribution used by developed nations to narrow the gap between haves and have-nots.

Pan Shiyi, chairman of leading Chinese real estate developer Soho China, recently drew public attention by calling for a fixed asset tax. He said he knew a person who owned 100 condo units in Beijing.

The taxation of apartments is possible under the existing system. The Shanghai and Chongqing city governments introduced fixed asset taxes on a trial basis in 2011, but these have generated hardly any of the intended results because they do not apply to homes purchased before 2011 or bought to replace older units.

There are many reasons for the lack of a fixed asset tax in China. For example, introducing such a tax across the board could dampen personal consumption and weaken economic activity. If it were introduced with extensive exemptions to avoid such an outcome, the levy would prove useless, as in Shanghai and Chongqing. And inevitably, some people would also seek to avoid the tax through bogus divorces.

In addition, a theoretical question remains whether the right to use land can be taxed, while it is difficult to make a fair market evaluation of such rights as assets. Inequality will occur even to the value of buildings depending on how to assess them.

Wealthy leadership
Few leaders favor a fixed asset tax because they are themselves among the wealthy subject to such a levy. Even if they agree, they may work out various legal clauses to exempt vested interests from tax payments.

Under China's political system, it is hard to tell who, including leaders, are paying taxes. One economist, who urged the government to introduce a fixed asset tax a decade ago, said there would be no change if the tax were adopted.

The assets of powerful people in China are rarely disclosed. Inequality will surely expand with a fixed asset tax.

During the 10-year Cultural Revolution that began in 1966, bureaucrats were bitterly denounced as "capitalist roaders," who were steering China towards full-scale capitalist restoration. At the beginning of the movement, tens of millions of workers, peasants and students became enraged at bureaucrats as the privileged class.

Is such a movement the only way of correcting social inequality in China? Let's hope not.

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