The reasons of high price of houses in China

The high price of houses in china is the most anxious thing for
Chinese people. The high price of houses is not only for the citizens
in the four first-tier cities, which are Beijing, Shanghai, Guangzhou
and Shenzhen, but also for the residents in the second-tier and
third-tier cities. A research shows that for a graduate, if they
purchase the average apartment by themselves in average cities,
they have to work more than 10 years considering the promotion in
future. Owing a house is a special traditional perspective in China,
because China is a traditional agricultural country. The land is
endowed with special meaning for the generations Chinese. Apart
from this, this essay will discuss the real reason why the price of
houses in China is so high compare to other countries.
Some people think that the relation between supply and demand
and the system of dividing taxes causes the high prices of houses. It
is true that if the supply of the houses is less than the demand, the
price of houses will be higher. The population in china is a big
number.

This

is

called

by

demographic

bonus.

Ling

(2012)

summarized that demographic bonus is an essential factor of the

rapid economic developing in China. A few years after reform and
opening-up, almost every family, which was made of parents and
more than 3 children, lives in a house. This caused that the need of
houses ascended more than 3 times around in 2000, because after
the children grow up and married, they need a house to run their
own family. Their parents and brothers and sisters are a good

method of borrowing money. But the number of apartment in city is

not enough for the need. Therefore, it causes the high price of
houses or apartment. Owing to they use the borrowed money to pay
for the houses. As a research shows that the demographic bonus will
vanish until 2020. At that time, the prices of houses in China will
decline.
Another reason is the system of dividing taxes. In 1980s, central
government give the rights to local governments, local governments
hand in the 20% of fiscal revenue to the central government.
However, in 1992, the total government revenue is 350 billion,
comparing to the 100 billion of central government revenue.
However, the expenditure of central government is 200 billion in this
year. Therefore, the deficit of central government is 100 billion. The
functions

of

central

government

are

building

infrastructure,

engaging in foreign trade, establishing welfare and organizing

armies, but the local governments just focus on developing the local
economy. Therefore, the central government enact the system of
dividing taxes, which require the local governments hand in 75% of
the fiscal revenue. After enacting the policy, the revenue of central
government ascended to double in the next year. Although central
government will allocate funds to local government, it could not
achieve the absolute fair. It will allocate more funds on the
promising cities. Consequently, the local government worked out
that selling the land to real estate companies so as to get more
revenue and get a decent data in GDP. Although most people argue

the high price of the houses is blamed for the insidious real estate
companies, actually, the profit of real estate companies is about
10% and most of it flows to the pocket of local government.
However, these two points are not the key point for the reason of
the high price of houses. Apparently, the supply is greater than the
demand, so the price rises. But the assumption of this theory is the
same of product homogeneity. Housing is one of the commodities
that own the most differential. For this reason, this theory is not
suitable in the situation. For the second point, if the local
government lowers the land price, it possibly not causes the lower
houses price. It depends on whether the supply of land will increase.
If the supply of the land does not increase, it will only increase the
profit of the real estate companies instead of lower the price of
houses. This is according to the theory, under the fix supply, the
price does not matter to the cost. For example, the prices of Van
Goghs paintings totally are dependent on the buyers economic
capability and willing. For this reason is the supply is fix, the limited
land supply.
Essentially, the key reason for the high price of houses is the
unsymmetrical

distribution

of

resources.

People

purchase

apartment within the third ring in Beijing is different from purchase

a apartment in a third-tier city. Even though they purchase the same
area, people in Beijing can enjoy more job opportunities in the top
100 enterprises, consult the best doctor and accept the best
education to their children. Therefore, the price of houses includes

all of the unapparent benefits. Although it is similar with the relation

between supply and demand, the relation between supply and
demand is the hypostatic reason. In economics, Kagie and Wezel
(2007) stated that it uses hedonic price model to evaluate the price
of houses. There are only four first-tier cities in China. The best
education

resources,

job

resources,

medical

resources

are

concentrating on these cities. If peoples registered residence is

Beijing or Shanghai, their children will have less pressure in
university entrance examination. For this reason, Li and Chand
(2013) argued that when people purchase apartments, they
purchase the resources near their residences. These resources are
scarce in China. Following this theory, the price of houses in the four
first-tier cities will not lower a lot, unless the second-tier cities rise
and scatter the resources. If the central government intends to
inhibit the trend of higher houses price, they have to achieve the
uniform developing. But this is achieved hardly.
In conclusion, the relation between supply and demand and the
system of dividing taxes seem like reasonable explanation of the
high price of houses, but they are just surface reasons. The
unsymmetrical distribution of resources should be blamed for the
high price of houses in metropolis. According to the hedonic price
model, people pursue the rich resources near their houses, but the
number of houses is limited. Thereby, the price of houses is rising.

Reference
Hazlitt, H. (1946). Economics in one lesson. New York, United States.
Harper & Brothers.
Ling, S. (2012). Are house prices too high in China? China Economic
Review, 23(1), 1206-1210.
Kagie, M. & Wezel, M. V. (2007). Hedonic price models and indices
based on boosting applied to the Dutch housing market. Intelligent
Systems In Accounting, Finance And Management, 15(3), 85-106.
Li, Q. & Chand, S. (2013). House prices and market fundamentals in
urban China. Habitat International, 40(7), 148-153.