Why Housing in Changsha Is So “Cheap”

       Expensive housing and rising prices of real estate have become a heavy burden on residents across the world. Among the global cities, however, housing prices in those of China seem to be out of control. In a short article on McGill Business Review, Benny Lin claims seven out of ten most expensive property markets in the world are in China. For example, the price to income ratio in Beijing is 22.3, which is significantly higher than a standard number of 4 (Lin). Lin’s statement may be a bit of an exaggeration, but it is true that housing prices in Chinese cities are abnormally high. This phenomenon appears puzzling since China is still considered as a developing country with an average income that is much lower than that of developed countries. Sean Linkletter points out four factors that contribute to this phenomenon: high saving rate and parental financing support; a limited number of investment vehicles; high population density and urbanization; and strong income growth (Linkletter).

       Another equally puzzling phenomenon about Chinese cities is low housing prices in Changsha, which is the focal point of this report. According to a ranking of Chinese cities by GDP in 2020, Changsha is ranked fifteenth in China with an economic scale of 1.2143 trillion Chinese yuan (“GDP Ranking of Top 100 Cities in 2020 China”). One might expect the real estate prices in Changsha to closely match its economic power, but the results turn out to be the complete opposite. A study complied by E-House China R&D Institute of housing price to income ratio in fifty Chinese cities demonstrate that Changsha has the lowest ratio number of 6.4, with Shenzhen having the highest ratio number of 35.2 (E-House China R&D Institute, 4). It makes sense that housing prices in Changsha are cheaper than top-tier cities or major cities on the east coast, but they are much lower than cities in the interior regions with smaller GDP as well. This has gained Changsha the reputation of having “housing price depression.” Why, then, is housing so “cheap” in Changsha?

       One reason that results in high real estate prices in Chinese cities is revenue from land sales (土地让出金).  Municipal governments profit hugely from land sales to real estate developers. According to Lin Yan’s article on revenue from land sales, taxes collected from construction and real estate developers constitute two of the biggest sources of revenues for municipal governments (Lin, 17).  This compels developers to increase housing prices as well. You-tien Hsing’s work The Great Urban Transformation: Politics of Land and Property in China shows how this is possible for municipal governments after land reform in the 1980s and real estate market reform in the 1997. Changsha was one of the several localities You-tien Hsing chose for analysis. She mentions how “a district chief in Changsha, the capital of Hunan Province, took me on a tour of the city. He repeatedly referred to the land under direct proprietary control of the district government as ‘his land’ (Hsing, 33).” The land-centered accumulation politics in Changsha are thus not much different than in Jinan, Nanjing, or Beijing (other localities for her analysis). This makes the phenomenon of low housing prices in Changsha even more intriguing. This report is a preliminary attempt to explain this phenomenon by focusing on supply and demand of real estate markets.

Supply  

       The municipal government of Changsha adopts a multi-centered approach to urban development. According to the government report “Changsha Master Urban Plan 2003-2020 (长沙市城市总体规划 2003-2020),” the city of Changsha has multiple centers: one metropolitan center, two sub-centers, and five cluster centers. The metropolitan center is naturally the CBD area of Changsha, and a summarization of other centers is as below:

Sub-center 1, Yuelu District (岳麓片区): research universities and high-tech development zone.

Sub-center 2, Xingma District (星马片区):  Xingsha state-level economic development zone and Longping high-tech science park; focusing on new industries, high-tech agriculture, aviation industries, and leisure culture industries.

Cluster center 1, Muyun Cluster (暮云组团): tourism, trade, and public facilities for sports.

Cluster center 2, Jinxia Cluster (金霞组团): transportation and storage center of water carriage, highway, and railroad.

Cluster center 3, Pingpu Cluster (坪浦组团): land development for university towns that are associated with Hunan University, Hunan Normal University, and Central South University.

Cluster center 4, Konggang Cluster (空港组团): industries related to air transportation.

Cluster center 5, Huangli Cluster (黄黎组团): business and office buildings, conferences, exhibits, entertainment, and innovation.

       Although cutting-edge commercial, financial, and service sectors still concentrate in the CBD area of Changsha, we can see an effort by municipal government to decentralize urban development and diversify industries in various districts of the city. This also means people have more opportunities to find a job outside of the CBD area and more choices when it comes to housing. As a result, housing prices in the “core” area are not significantly higher than those of “peripheries.” For example, according to housing prices during the third quarter of 2021 in Changsha, the average price for Kaifu district (CBD) is 13,263 CNY/ m² while that for Yuelu district is 12,856 CNY/ m². In comparison, the average housing price is 67,859 CNY/ m² for Beijing, 67,676 CNY/ m² for Shanghai, and 19,667 CNY/ m² for Wuhan on November 2021 (“Housing Price Rank in National Cities”). If people still find housing prices too high in the city, they can further move into Ningxiang, Liuyang, and Xingsha, the three satellite cities of Changsha. Two of them have an average price that is lower than 6000 CNY/ m² (“Changsha’s Housing Price Map in Q3”). These cities and Changsha are incorporated into a “one-hour metropolitan area” network of railroad, water transportation, bullet train, highway, and subway (Changsha Master Urban Plan 2003-2020, 26).

       The municipal government of Changsha also deliberately makes sure that there is a larger supply of land than demand of it. The “Changsha Master Urban Plan 2003-2020” states that the target for the year 2020 is to have 6.29 million people living in the urban area with 629 squared kilometers of land for house construction (Changsha Master Urban Plan 2003-2020, 13). Thus, roughly, 10,000 people live in one square kilometer. Given most real estate developers in China build skyscrapers, the land supply for housing seems more than enough. In addition, the municipal government demands that the final transaction price of land sales to real estate developers should not exceed 150% of the starting price. This guarantees that developers can purchase land from government at a relatively low price and eventually lower housing prices as well. Changsha is not the only municipality that carries out this policy, but it has so far exerted stricter restriction on price increase.  (“Why Changsha Has Done a Good Job at Regulating Real Estate Market?”).

Demand

       The other aspect of the municipal government’s efforts to lower housing prices is to decrease demand of houses, namely making buying houses more difficult for customers. The real estate market in Changsha is not a free market in which anyone can walk in and buy whatever he/she wants. According to the government document “On Further Works to Strengthen Regulation of Real Estate Market (“On Further Works to Strengthen Regulation of Real Estate Market”),” a household can purchase at most two houses in Changsha; after purchasing the first house, a household should wait at least four years to buy the second one; an immigrant can only buy a house after he/she has registered as a Changsha resident, is employed, and has paid social insurances for 24 months (this rule does not apply to soldiers in active service or college graduates). In addition, the municipal government raised the house deed tax of the second house purchase to 4%, which is higher than that of Beijing, Shanghai, and Wuhan (“On Alternating the House Deed Tax Policy of the Second House Purchase in the City of Changsha”).

       This is strictly linked to the battle against real estate speculation groups. Real estate speculation groups are people who apply stock market techniques into real estate market. They often bring a large amount of hot money into the market, purchase many houses at a low price and sell them at a much higher price. Real estate speculation groups contribute to high housing prices in many Chinese cities. As Linkletter has commented, “Low returns on bank deposits and immature stock and bond markets have made real estate China’s preferred store of wealth, leading to large investment allocation in housing.” In 2018 the municipal government claimed that “the main controversy in Changsha’s regulation of real estate market is not the conflict between demand and supply, but the major battle between real estate speculation and anti-speculation”; as if real estate speculation groups were class enemies (Li). By making purchasing multiple houses difficult in Changsha, the municipal government effectively contains real estate speculation.

Conclusion

       Compared to top-tier cities or major cities in the east coast, Changsha has less cutting-edge industries, job opportunities, or prestigious universities, and this makes Changsha less attractive for immigrants and therefore may contributes to low housing price in Changsha. However, Changsha also has lower housing price compared to cities in the same league or those that are less economically developed. Therefore, the policies of the municipal government must have carried weight in balancing housing price in Changsha. In return, low housing price could help Changsha become more attractive by contributing to the development of new business. In an article in YiMagazine titled “Why Nationally Famous Food & Beverage Brands All Come from Changsha,” Shi Ge points out that many Food & Beverage brands born in Changsha successfully expanded into top-tier cities like Beijing and Shanghai. The financing scale of these companies range from two billion CNY to ten billon CNY. Shi Ge considers low housing price in Changsha to be an important factor of this success since young people have more money to spend on entertainment rather than saving up to purchase a house. In recent years, Changsha also attracted more and more immigrants to settle down in this city. The population of Changsha increased 42.64 percent from 2010 to 2020. This makes Changsha the third “ten-million people” city in central China with the other two being Wuhan in Hubei and Zhengzhou in Henan (Lin Xiaozhao). Although it is hard to say what exactly contributed to population increase in Changsha, it is reasonable to state that low housing prices and new business opportunities make the city more appealing to immigrants.

       The success of Changsha’s regulation of real estate market makes it a model of battling sky high housing price for the Chinese government. For example, the Housing and Urban-Rural Development Department published an article promoting Changsha’s experience in controlling real estate market prices. Changsha’s municipal government has also introduced their experience to delegations from other municipalities across the country (Li). In an interview, the party secretary of Changsha, Hu Henghua, listed low housing prices and high-quality basic education as the main reasons Changsha can attract immigrants (“Changsha’s ‘Magic’ of Low Housing Price and High Development”). Clearly the municipal government of Changsha has recognized low housing price in Changsha as an advantage and is determined to maintain this advantage. The high housing price problem in China is a result of powerful municipalities that are in an eager pursuit of rapid urbanization. The experience of Changsha, however, demonstrates that this power, if used correctly, might help rein in the problem of inflated housing prices.

Bibliography

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