Twenty years ago, China’s real estate market didn’t exist. It wasn’t until the mid-90s that a series of reforms allowed urban residents to own and sell real estate. People were then given the option to purchase their previously government-owned homes at incredibly favorable rates, and most of them made the transition to being property owners. Now with a population provisioned with houses that they could sell at their discretion and the ability to buy homes of their choice, China’s real estate market was set to boom. By 2010, a little over a decade later, it would be the largest such market in the world.
When we talk about how people afford houses in China today, more often than not we’re not talking about individuals going out and buying property on their own — as is the general modus operandi in the West. No, we’re talking about entire familial and friend networks who financially assist each other in the pursuit of housing.
At the inner-circle of this social network is often the home buyer’s parents. When a young individual strikes out on their own, lands a decent job, and begins looking to pursue marriage, getting a house is often an essential part of the conversation. Owning a home is virtually a social necessity for an adult in China, and is often a significant part of the criteria for evaluating a potential spouse. As parents tend to move into their children’s homes in old age, this truly is a multi-generational affair. So parents will often fork over a large portion of their savings to provision their children with an adequate house – often buying it years in advance. If parents are not financially able to buy their kids a home outright, they will generally help with the down payment, or at the very least, provide access to their social network to borrow the required funds.
Take for example the case of Ye Qiuqin, a resident of Ordos Kangbashi who owns two houses across the country in Guangdong province, where she is originally from. Together with her fiancé, she makes roughly US$3,200 per month from running a cram school. For her first home she made a down payment of roughly US$20,000; of which $3,300 came from her parents, $10,000 came in the form of loans from her sister and friends, and the rest came from her savings.
To decrease the amount of volatility in China’s often hot property market, there are very strict rules as to how much money people can borrow from the bank for purchasing real estate. Although this slightly varies by city and wavers in response to current economic conditions, for their first home a buyer must lay down a 30% down payment, for the second it’s 60%, and for any property beyond this financing isn’t available. So for people to buy homes in this country they need to step up to the table with a large amount of cash in hand. In fact, 15% of all residential property in China is paid for in full upfront.
Why there is so much liquid cash available for these relatively large down payments is straight forward: the Chinese are some of the best savers in the world. In fact, with a savings rate that equates to 50% of its GDP, China has the third highest such rate in the world. As almost a cultural mandate, the Chinese stash away roughly 30% of their income, which is often called into use for such things as making a down payment on a home — which is the most important financial transaction that many Chinese will ever make.
Another way that Chinese home buyers are able to afford their down payments is via the country’s Housing Provident Fund. This fund began when the country started privatizing urban housing as way to help residents afford to buy their homes. Part of this fund included a government initiated savings plan where employees are given the option to invest a portion of their monthly earnings and have it matched by their employer to assist them with buying a house.
Once the down payment is accounted for, getting mortgages in China is a relatively straight forward affair, and the standards for qualifying are relatively low. For the most part, a borrower’s monthly salary must be at least twice the monthly repayment rate of the loan. Interest rates hover around 6%. On average, those who have these loans will devote between 30% and 50% of their monthly income towards paying them back.
While there is much talk in China and abroad about the increasing number of Chinese home buyers taking out mortgages, relative statistics should quell the hype. Just 18% of Chinese households have mortgages, compared with half of all home owners in the USA. China’s home mortgage-to-GDP ratio was just 15% in 2012, whereas in the USA it was a staggering 81.4%. Although monthly wages in China tend to be relative low, non-performance on mortgages is virtually unheard of — in 2013 the default rate was a mere 0.17%.
Although we must remember here that China’s banks are fully owned by the Communist Party, and social stability often takes precedence over the raw pursuit of profit, so their lending practices cannot be compared like-for-like against those of Western banks.
Part of China’s boldness when it comes to spending relatively large amounts of money on housing comes from the assumption that wages will continue rising. Nominal income growth in urban China has been going up at a 13% clip annually over the past decade, while annual per-capita disposable income has risen from $1,800 in 2006 to around $4,800 today.