Like Seattle, Portland and San Francisco, Shanghai has been experiencing massive increases in housing prices over the past couple of years. Many salespersons are saying that it feels a lot like a bubble, but in a recent article by the Economist, it is noted that the sharp rise in prices does not match the local economic trends and that a bubble is a misdiagnosis of the problem. Instead, the real problem comes from a shortage in land supply. The city is a large contributor to China’s overall GDP and thus, most people living in the cities surrounding Shanghai will commute into the city for their job. However, owning a house in Shanghai is the real social class marker. With sky rocketing prices and a certain level of luxury, Shanghai is commonly referred to as the “Paris of the East,” an eastern New York city if you will. It makes sense that if someone works in the city, they may want to buy a house there to make the commute easier, but as a result the smaller cities surrounding Shanghai are experiencing shrinking populations. In addition due to new regulations, if a married couple divorces and they each purchase a house then remarry, they can get a preferential mortgage rate on only their first house – adding to the property sales frenzy.
The lack of homeownership in the smaller cities and temporary residencies that are only used on the weekends when individuals return home for the weekend after working in the city, contribute to a larger economic problem. Without a strong workforce the smaller cities, like Jiuhuashan, economies are slowing down and losing purchasing power. There has been talk of potentially selling the unused land in small cities to the big cities, however doing so would only further the problems for the smaller city governments. “Governments in big cities count on incremental land sales as a source of revenue; governments in small cities hope the restrictions will eventually send people their way.” While Shanghai officials have done well to protect the housing market from issues like over-borrowing by homeowners, there hasn’t been much done to help support neighboring city populations.
While there has been a 66% increase in land prices this year, there has yet to be a nationwide crash. The borrowing by homeowners is being kept to a minimum and the larger concern rests on the infrastructure impact for surrounding cities and the borrowing that is occurring by property developers who are attempting to take advantage of the high demand. In an article released two days ago by Shanghai Daily, the larger city governments are implementing restrictive measures to attempt and slow the rising prices and change the consumer mindset from “buy now” to “wait and see.” The idea is to avoid contraction of housing prices, but rather slow the pace by either limiting the number of homes individuals can purchase or increasing down payments. So far, the increased regulations have helped to curb purchasing rates and rising prices, but only time will tell if these regulations will hold in the long run.