The Impact of Housing Reforms & the Real Estate Market - Article Example

name} {course} {date} The Impact of Housing Reforms & the Real Estate Market on Urban Middle-Class Identity in China 1. Introduction As a part of its rapidly-growing economic strength, China is experiencing a number of social shifts that force the country to confront a delicate balance of conflicting forces. Economic opportunities, increasing personal prosperity and globalization fuel China’s urban development and the expansion of the urban population throughout the country, but most notably in China’s “two capitals”: the political center of the country in Beijing, and the financial capital of Shanghai. The difficult balance that must be managed by the country is between the growing expectations and identity of the new Chinese middle class, the political aspects of planning and control, and the economic drivers that impact land and housing planning and use. The unique conditions within China are well-known to even the most casual observer, but bear summarizing to put the following discussion in context. China is, of course, ostensibly a Communist country, with a political tradition – at least since the end of World War II – of planned economy and strict social control. Chinese traditions regarding family, gender roles, education and career, and particularly the handling of money are very strong; as one Shanghai banking executive points out, the deep Chinese aversion to debt has made the credit card business slow to get off the ground in China, simply because most customers cannot conceive of ‘carrying a balance’ and pay off their entire bill every month. (Gross, 2009) Opposing these strong conservative forces in Chinese society is the push for a more liberalized and globalized economy, encouraged by the government and enthusiastically embraced by the people. This has created a shift in China’s population towards the cities, which are now growing at an incredible rate. More importantly, the cities are populated with a growing middle class that did not even exist in any practical sense even 20 years ago; a middle class that has been exposed to and developed a taste for foreign goods and styles, and moreover, thanks to China’s economic success, has the resources to pursue those desires. This is reflected in the urban housing market just as it is in more mundane material aims like the latest clothing fashions from Europe or America, or the newest electronic gadgets. Unlike those mundane goods, however, the urban residential real estate market is physically, and to some extent emotionally, reshaping the Chinese landscape. This essay will address three main questions about how the development of contemporary urban China – specifically, in Shanghai and Beijing – contributes to the emerging identity of China’s middle class. First, what is the state of the urban real estate economy in China, and how has the interaction between land and housing planning and reform and economic growth shaped this sector? Second, how is the image of China’s emerging middle class shaped by and reflected in how residential real estate is marketed, and to what degree does globalization – which is reflected in the growing number of transnational professionals in the middle class – play a role? And finally, how do the images marketed to the real estate buyers reflect the globalization of Chinese cities and the people? 2. The State of the Chinese Urban Real Estate Market 2.1 Economic Factors For the past several years, the real estate market in China’s largest cities has been enjoying a boom. In Beijing, for example, property prices have risen 40% since 2007, with a square meter of residential space in the capital costing an average of 26,000 yuan ($3,800), putting the dream of owning property out of reach of most workers, who earn an average of 2,000 yuan a month. (Beznova, 2010) Beijing and Shanghai in particular have been susceptible to real-estate speculation, leading many analysts to warn of a real estate “bubble” – in other words, a point at which real estate is overvalued and cannot sustain its price – that could burst as early as this year, which would of course result in a dramatic decline in prices. (“China Real Estate Is Overheated, Nomura Asset Says”, 2010) The current potential crisis is not the first time a housing bubble has appeared in Beijing and Shanghai. Since the government began reforming the strictly-controlled housing sector in 1998, Shanghai has experienced what might be described as a housing bubble in 2003-2004, with Beijing having an even more clearly definable bubble between 2004 and 2008. (Shen, et al., 2005, and Hou, 2010) From a strictly economic point of view, there are three reasons for these recent sharp increases in housing prices. First, urbanization – described in terms of the growth of urban populations – has proceeded rapidly, expanding by nearly 29% in Beijing and around 11.5% in Shanghai between 2000 and 2007. (Hou, 2010, p. 21) Second, per capita disposal income has continued to grow at an average rate of 10% to 12% in both cities. (Ibid.) Third, because of the rapidly-growing urban populations, the larger part of the residential real estate market is made up of new housing units, with second-hand real estate maintaining a fairly low and steady percentage of one-fourth to one-third of the number of units sold in both cities for the past several years. (Ibid., p. 23) New housing naturally commands a higher price than existing property, and this is only increased with growing demand. This has led to a situation, to some extent in Shanghai but particularly in Beijing, where prices for housing units have rapidly outgrown the ability of the economic segment – the middle class – for whom they were designed to afford them. (Mengjie, et al., 2008, pp. 277-278) To counter what could be a crisis, the Chinese government has implemented a number of steps such as requiring larger bank reserves to slow lending and imposing additional taxes on property sold less than five years from its date of purchase to discourage speculation. (“China Real Estate Is Overheated, Nomura Asset Says”, 2010) But these measures must be balanced against the attractive income government authorities can earn through transferring state-owned property to private owners and developers – by one estimate, local government at the city or provincial levels can earn up to 50% above their annual budget from land and building rights transfers, a total amount said to have been around 1.5 trillion yuan in 2009. (Beznova, 2010) – which makes the government reluctant to pursue very strong control measures. 2.2 The Catalyst for Urban and Housing Planning Since 1998, the control and planning of housing in China’s cities has devolved from a welfare-oriented system of distribution through the Danwei work units to a subsidy program. Under the program, members of the Danwei, who would have previously simply been assigned to housing by a coordinator for the local industry where they worked, were given subsidies corresponding to the work positions and lengths of service and allowed to purchase their housing units. As part of the same program, the real estate sector was also liberalized to a degree, since the workers receiving a subsidy could, conceivably, purchase housing other than the Danwei-supplied property. (Han, 2009) Because urban residential construction had stagnated for several decades, much of the available housing was overcrowded, overbuilt, and substandard; given a choice, many Danwei workers sought housing elsewhere, and this along with the influx of millions of new urban residents led to a supply problem that required a strong urban planning program. The necessity for planning was not unexpected by any means; the open-door policy implemented in 1979 that eased restrictions on rural-to-urban migration had the intended effect of reducing the surplus rural labor population and providing human resources for the growing urban-centered economy. (Chai & Chai, 1997) This meant that urban planning would have to proceed along two tracks: on the one hand, the residents of the old, unsuitable urban neighborhoods were moved to new, planned areas farther from the city centers; these areas also could be developed to settle the newcomers. (Ziegler, 2006, and Han, 2009) The clearing of the old neighborhoods opened up large areas within the cities, which could then be redeveloped. 3. The Influence of Globalization in Urban Residential Planning & Marketing The shape of China’s new cities has a significant impact on the global outlook of the people who live there, while at the same time, the attitudes and global orientation of the people help to define the character of the cities. Direct exposure to foreign businesses and FDI is a significant factor in urbanization in China’s coastal cities, of which Shanghai is the most prominent, and in the capital of Beijing, but does not have the same impact on urbanization elsewhere in the country. (Batisse, et al., 2004) In either city, neighborhoods adjoining or near to the areas in which foreign businesses or the homes of expatriates are located are considered more prestigious and residential units are in high demand. The effect is more noticeable in Beijing for two reasons. Foreign presence in the capital has historically been comparatively limited, so that the present foreign population – both businesses and people – is largely clustered in a more-defined area; specifically, the northeastern part of the city closer to the main airport. (Wu & Webber, 2004) The second reason is the hosting of the 2008 Olympics in Beijing, which increased the amount of open space in the city and further restricted and delineated the available residential area – while at the same time increasing the prestige factor, albeit in a slightly different global sense, of areas now near the various Olympic facilities. (Marvin, 2008) In Shanghai the effect is more diffuse than in Beijing, although the city does have a purpose-planned area of mixed Chinese and foreign presence in Pudong. The difference lies mainly in the population; Shanghai has a much greater population of transnational professionals, and even semi-professionals working for globally-connected businesses than does Beijing. (Sun & Chen in Wu (Ed.), 2007) In either city, the effect – whether it comes from direct contact with a global presence or a less-direct influence of transnational work – has a clear effect of differentiating residential areas into those that are more or less ‘global.’ Residents with a global outlook, in general, seek to live in these areas, and in turn, living in one of these areas seems to encourage an increasingly international outlook, although this effect is harder to quantify. (Sun & Chen, 2005) 4. Middle-Class Attitudes and How These Influence the View of Home Ownership The growth of China’s middle class – defined as people who earn the equivalent of between $6,000 and $25,000 annually – has been as remarkable as the country’s economic growth. From virtually zero in 1995, this class grew to an estimated 87 million people by 2005, and is expected to reach 340 million people by 2016. (Song & Cui, 2009) Although Chinese culture traditionally places a high value on thrift, a combination of conditions has introduced a distinctly consumerist aspect to China’s middle class. The first of these is the traditional Chinese attitude towards honor and achievement – doing well in school, attaining a respectable career position, and bringing honor to one’s family. This becomes even more important given China’s one-child policy; from a very young age, children are driven to excel and are the sole focus of their parents’ attention. While this can be overbearing and harmful to some, to a great many – particularly those who succeed – it gives them a sense of entitlement, an inclination to feel as though they deserve prestige and material comforts. (Wang, 2009) Economic liberalization has provided these children a simple measure of their own prestige by way of their own purchasing power, and since this is a very western concept, purchasing foreign products and labels and adopting a global outlook, at least in a material sense, is almost automatic. (Durvasula & Lysonski, 2010) The one-child policy and the early focus on educational and career success give these consumers the opportunity to pursue their consumerism. Education leads to getting a high-paying job at a young age and middle-class affluence early in life. The result of this is a young middle class – mostly between the ages of 25 and 44, while 60% of China’s population overall is under age 35 – who spends a greater proportion of their income on luxury goods than their parents and people of similar age or class in North America or Europe. (Wang, 2009) In one respect, then, home ownership is simply a function of consumerism; in a class of society that attaches great importance to “owning things” to express their self-worth and establish prestige among their peers, real estate is about as far up the ladder as one can go. This is reinforced, however, by the Chinese sense of duty and patriotism, because home ownership has been officially promoted as government policy since Li Peng called on local leaders to develop programs to encourage it in 1991. (Davis in Link, et al. (Eds.), 2002, p. 242) Thus home ownership satisfies the twin aspirations of being not only a successful person, but a successful citizen as well. 5. The Impact and Reflection of Globalization in Chinese Real Estate Marketing How significant is the global connotation to the real estate market in Shanghai and Beijing? To test the question, a random real estate website from each city was chosen from a Google search; From Shanghai, the first two results in the “For Sale” category of the SPACE Realty homepage (SPACE Luxury Property Leasing & Sales, 2010) were: “Nice British style lane house ground floor with a big yard for sale- Great location, only five mins walking distance to Jing An Temple- Sogo and Subway line 2, Kerry Centre and Portman Hotel are just a stones’ throw away…” And, “This lane house is located in the Heart of French Concession, two blocks away from Xiangyang Park & Kwan Centre, surrounded by nail salon, dragonfly massage, café, good restaurants, flower market etc...” In Beijing, a listing of apartments for sale (Beijing Real Estate, 2010) advertises properties at the “Modern San Francisco International Center,” “Forte International Apartment,” “The International Center of Times,” “ShiAo International Center,” and the “Colorful International Apartment” on its first page. Clearly, international appeal, whether real or imagined, is a significant selling point. There is another, more subtle way in which real estate marketing expresses a more global outlook, at least in terms of traditional capitalism rather than Chinese Communist collectivism. Before liberalization, it was typical for the Chinese to refer to his or her “mother’s house” when speaking of the family home; collectivization had removed or at least significantly weakened male inheritance rights, and the home began to be thought of as the domain of the wife and mother. (Davis in Link, et al. (Eds.), 2002, p. 233) As Davis goes on to explain later (pp. 246-247), “The possibility of property ownership and the increased legitimacy for indulging personal comfort and displaying social distinctions refocused the energies of both men and women on domestic space…. However, once market reforms recapitalized domestic property and individuals could openly compete for status through conspicuous consumption, male attachments and investments in domestic space intensified. Most typically in both advertisements and home visits I observed a domestic space configured around the interests of a married couple who relished the opportunity to create a more comfortable and tasteful home for themselves and their single child. For these men and women, ‘my mother's house’ of the 1980s had been succeeded by ‘a home of our own.’” Davis also points out (pp. 237-238) that the display of status expressed by home décor has taken on a decidedly western flavor in recent years. Particularly in Shanghai, where Davis conducted her research, brands such as Ikea, Toto, American Standard, and Simmons are heavily advertised and popular with middle-class consumers. She adds (p. 238): “The impact of the new global styles is evident in the decorator magazines sold in state-run bookstores, small kiosks, and even the newly opened Shanghai Library. In these magazines the home is a happy nest, a warm and cozy place, in which residents (zhuren) display (tixian) their cultivation (xiuyang), personality (xingge), and economic power (jingji shili).” Considering the overall popularity of foreign brands in other consumer goods, it is not unexpected that décor and furnishings for the home, the most important symbol of material status, would follow the same trend. The marketing appeal for residential real estate as well as the things with which to turn it into a home is based on two psychological applications of marketing. The first is the application of factors such as attitude to debt and consumer sentiment to purely economic and demographic factors to develop a broader-based market segment of likely buyers. Since the ratio of price to earnings for residential real estate in China’s major cities is quite high, ranging from 8:1 to 32:1 (a range between 3:1 and 6:1 is considered normal), relying on conventional quantitative measures would limit the potential market. (Wang, et al., 2001) In other words, the marketer is identifying those who would be inclined to buy if they could, even though their financial status seems to eliminate the possibility. What follows is the application of “experiential marketing,” which treats the sale-purchase exercise not as a discrete transaction, but as a complete intellectually and emotionally stimulating “experience,” wherein each step of the process ideally encourages the customer to become emotionally invested. (Zheyu & Chunying, 2009) The particular imagery of advertisements and articles in the home decorating magazines noted by Davis above, and the references to “British” or “French” and inclusion of the word “International” in property site names in the real estate advertising from Shanghai and Beijing are simple examples of experiential cues the marketer can use to appeal to the customer’s emotions. On seeing a western-style home in a decorating magazine or reading an advertisement for a place called the “Modern San Francisco International Center,” the buyer is invited to “imagine yourself here.” This then becomes the goal in the purchase process. This very capitalistic way of marketing to the traditionally debt-averse, frugal Chinese is one way in which the real estate market reflects the growing globalization of the Chinese middle class and their cities. Another way in which globalization is reflected is not so much a matter of physical imagery, but of an attitude and a not-so-subtle realignment of society. In Shanghai, China’s financial capital, real estate speculation has become a popular activity and topic of conversation, according to Newsweek’s Daniel Gross. (2009) Those who are most successful are those who were able to purchase real estate early in the liberalization drive; they soon found themselves holding property worth many times its original value, allowing them to either sell it at a considerable profit, or, as in the case of one middle-aged couple Gross describes, purchase a nice upscale home for themselves on the rent proceeds of their old-but-now-trendy residence. 20 years ago, it would have been unthinkable for a citizen of Shanghai to move out of his home, especially if he owned it; now, it seems, the drive is to trade up for a better model as soon as possible, in much the same way one seeks out the latest cell phone model or the hottest new fashions. 6. Conclusion The urban residential real estate market in China, epitomized by the country’s two most important cities of Beijing and Shanghai, is approaching a critically unstable condition in economic terms. High demand and speculation have driven prices to historic and possibly unsustainable levels, putting the dream of home ownership out of reach for much of China’s growing middle class, and setting up the potential for an economically-damaging housing bubble. While the present situation may ultimately have negative effects, in some respects it is a sign of China’s success in its economic and urban development programs. Were it not for the rapid growth of the middle class and the growing global outlook they have, particularly in cities like Beijing and Shanghai, a housing bubble would not be a problem China would have the opportunity to experience. The globalization of the middle class is in some ways systemic, because it was the initiative of the government which allowed the rise of the middle class. Increased economic liberalization gave more Chinese private-sector opportunities, not just in the domestic economy, but through exposure and employment with foreign businesses who were encouraged to set up shop in China. Much of this foreign influence concentrated in Beijing and Shanghai. To support the growing economy and reduce the rural labor surplus, the government loosened restrictions on rural-to-urban migration; this, along with encouraging people to reinvest in the country through home ownership, necessitated planned urban development. The new-found wealth of the middle class was thus created by the opportunities provided by the government initiatives. Because China’s famous (or infamous, depending on one’s point of view) one-child policy had created a younger, entitled, materialistic population, consumerism and spending power became new measures of social status and prestige, and created an appetite for foreign brands. This was especially significant among transnational professionals – that part of the new middle class that does business in some fashion with the world outside China – and was especially significant for the two cities where foreigners were most likely to live or pursue commerce, Shanghai and Beijing. In addition, Beijing gained additional global prominence by hosting the 2008 Olympics. Just as the global orientation of the middle class is expressed in their preferences for consumer goods, real estate marketing reflects and caters to the growing global attitudes. Middle-class Chinese tend to cluster in desirable parts of cities; in Beijing, these areas are more well-defined than in Beijing. As a result, communities of people with similar global outlooks form, which in turn influences and reinforces those outlooks among the residents. (Sun & Chen, 2005) Marketing and advertising of real estate and even home décor and furnishings highlights global emotional cues by featuring foreign styles and brands, and adopting a western – or at least very capitalist – gender-neutral or family appeal. (Davis in Link, et al. (Eds.), 2002) In Shanghai in particular, globalization of the middle class has seemingly reached its highest, most un-Chinese manifestation in regarding property as a commodity, which brings the tale full circle to the tenuous state of China’s real estate market. While Shanghai observers are careful to point out that what happens there, and to a slightly different degree in Beijing, are not indicative of the entire country (Gross, 2009), it might be reasonable to say that it is at least a start of trend, for it is a situation that did not exist a generation ago. 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