Home Truths: Increasing House Prices and Small Property Rights in China

Updated: Jan 21

Written by: Edward Berry

Theodor Lundqvist/Unsplash

Introduction

Against the background of the ‘Chinese Dream’ that President Xi Jingping promises, it is a home truth that increasing house prices remains a prevalent issue for the people of modern China. Since the residential private property market began in 1989, house prices have increased by over 2000%. With prices in eight major cities increasing by four times in the last decade,[1] and six times in Beijing alone,[2] this has led to ‘homeownership becoming an unachievable dream for many beneficiaries of China’s economic transformation’.[3]


This article will investigate the issue of increasing house prices and argue that it has created a reliance on ‘small property rights’ in Chinese society. It begins by noting recent attempts by the Chinese Communist Party (hereafter CCP) to address this issue. After defining small property rights, it then links their rise in importance to the existence of high house prices. It will then highlight specific concerns surrounding small property rights, in particular, issues of legitimacy and overall enforceability. It concludes that until house prices decrease and properties become obtainable, small property rights will continue to boom in China.


An Issue Close to Home- The CCP’s Response

The issue of high house prices has been frequently recognised by the CCP’s leadership. President Xi Jingping famously stressed that homes were for “living in, not for speculating”.[4] Similarly, with thriving real estate trading in provinces such as Guangzhou and Chongqing in mind, Vice Premier Han Zheng set the tone of the CCP’s position, noting that property is more than just a tool to stimulate China’s economy. At the root of these concerns is the issue of social inequality. Wang and Lai et al. conclude that housing wealth is seen as the ‘main cause of wealth inequality in China’,[5] whilst Hamnett agrees that ‘home ownership is closely linked with housing wealth and wealth distribution’.[6] This has further been stressed by Xinhua News Agency, which called for reasonable home prices, as the young were unable to purchase properties in the city. As President Xi Jingping’s rule continues to strive towards ‘common prosperity’ for the Chinese people, it is clear that ‘unaffordable housing directly conflicts with this aim’.[7]


To respond to these pressures, the CCP have introduced various layers of regulation into the real estate market. It has committed to the construction of 30 million low-rent housing across 40 cities in China, with the aim of increasing affordability for low-income households.[8] This has been supplemented with an increase in mortgage rates and closer scrutiny of credit lenders. Further, local governments have been called to play an active role throughout the purchasing process. Zhang Qiguang, an official of the Ministry of Housing and Urban-Rural development, warned municipalities that rapid increase in house prices would be investigated thoroughly. More recently, the introduction of a property tax has been endorsed by President Xi Jingping and the State Council, with pilot programs to begin next year.[9]


These measures have shown early signs of success. In September 2021, the National Bureau of Statistics documented an average house price drop of 0.5% in 35 of China’s 70 cities.[10] Nevertheless, it is too early to fully assess these measures, as house prices in cities remain extremely high for Chinese citizens. However, it remains clear that the CCP follows this issue closely and are anxious to address it with various methods of regulation. It remains to be seen whether they are successful on this front.


The Rise of Small Property Rights in China

The increase in house prices throughout the last few decades have led to small property rights becoming an important reality of China’s property law system. Holding on to its socialist principles, China operates on a bifurcated land system, distinguishing between rural land and urban land. Although the transfer of property rights on urban land was approved in the Constitution and Land Administration Law (“LAL”) 1988, rural land remained owned by the collective villages. As a result, farmers are unable to legally transfer rural land rights unless approved by the local government.


High house prices in the cities and the inability to transfer rural land rights created a housing system that left many Chinese citizens unable to obtain property in a legal manner. In light of this reality, villagers in China have illegally transferred rural land rights to purchasers outside of their villages. This has created a large informal housing sector, termed ‘Small Property Right Housing’. The purchaser would illegally receive small property rights, as ‘their property rights are “smaller” (weaker) than those on the urban formal housing market, which have “big” property rights protected by the government’.[11] As Shenjing notes, the rise of Small Property Right Housing is ‘an informal countermeasure responding on the one hand, to the deficit of formal sector affordable housing supply and on the other, to towering housing demand from low-income groups and rural migrants’.[12]


Small property rights have become an important feature of China’s property law system, with research finding that Small Property Right Housing is enjoyed by around 250 million Chinese residents across the country.[13] Qiao’s work, which explores the existence of small property rights in Shenzhen, finds that 48% of city housing only exercise small property rights.[14] As a result, these ‘illegal buildings, lacking legal titles and concentrated in 320 intracity villages, host most of the eight million migrant workers in Shenzhen and are the main livelihoods of the more than 300,000 local villagers’.[15] Similar studies emphasise the growing reliance on informal property rights, finding that in cities such as Beijing and Xi’an around a quarter of housing has not been purchased through the formal legal route.[16]


As house prices increase, Small Property Right Housing remains an attractive option for accessing property, with average prices being 52.82% lower than that of formal commercial housing apartments.[17] This is reinforced by the fact that, despite their illegality, small property rights have been absorbed and adopted by legitimate actors in the real estate market, such as estate agents, solicitors and local government agencies. As a result, Small Property Right Housing has become entrenched in Chinese society and will remain entrenched until homeownership can be achieved easier through formal means.


Shaky Foundations? The Issue of Small Property Rights

It is submitted that the growing reliance on small property rights has left China’s property law system on shaky foundations. As stated above, small property rights are obtained illegally and therefore are not protected by the government or recognised by the law. Thus, the purchaser receives no formal title when purchasing their property and instead relies on a simple contract with the seller of the property. If a dispute over a property transfer arises, key questions concerning enforceability and possible remedies arise. Whilst a formal title will be legally recognised by the courts, lesser small property rights remain controversial. Qiao notes that ‘the courts in Shenzhen declined to adjudicate most of the cases involving small-property transactions’ as it was ‘policy matter for the local government’.[18] This has led to the current situation in which an important and growing sector of China’s real estate system receives no protection under the law. Thus, disputes arising in property transfers, boundary and legal title will remain unanswered and will rest in limbo, supporting the argument that reliance on small property rights has led to China’s property law system resting on unstable foundations.

Similarly, owners of small property rights do not receive economic benefits associated with government issued title. Wang and Sun note that ‘without formal recognition in legal title’, small property rights cannot ‘protect investors' rights to pursue and retain their investment returns or legally facilitate transfer of ownership’.[19] The inability to legally transfer such properties can create a potential stalemate in the real estate market, with the response of the creation of new Small Property Right Housing to meet social demand. This increases the amount of small property rights in the real estate market and as a result raises issues of its stability.


The lack of legal protection for small property rights is worsened when met with hostility from the political arena. Following the 18th Party Congress in 2012, the Ministry of Housing and Urban-Rural Development emphasised the need to ‘rigorously curb the construction and sale of Small Property Rights’ Housing’.[20] Moreover, there has been a pressing argument in the party to address the rise in Small Property Housing on the basis of maintaining state legitimacy.[21]

Nevertheless, the important role of the Small Property Rights in reducing social inequality has arguably shielded it from a sweeping overhaul by the CCP. Liua et al. agree with this point, adding that ‘few SPRH developments have been demolished and such developments have still been increasing at a steady rate’.[22] A full attack on Small Property Right Housing from a party that strives for ‘common prosperity’ and houses for ‘living in’ seems impracticable at this stage.

Whilst this may support the argument that small property rights are stable in Chinese society, the fact remains that small property rights receive no protection against government interference and cannot be enforced. Under the Real Estate and Administrative Law, amended in 2019, legal property rights such as legal title and leaseholds receive a strong degree of protection against local government interference. This protection is unavailable to small property right holders, who remain vulnerable to this interference.


If the CCP are successful at decreasing house prices in China, the importance of Small Property Rights Housing will diminish. This is because purchasing property legally will become easier and thus the features that make small property rights attractive will be reduced significantly. Further, as more legal routes for purchasing property open for Chinese citizens, it will become harder for the CCP to politically defend the existence of large amounts of illegal housing. This could result in local governments moving to address this issue, with small property rights remaining unenforceable against any interference. As stressed earlier, the CCP have taken an active role in the real estate market with additional regulations and oversight. Using this momentum, it is not unreasonable to suggest that small property rights could be a target for reform in the near future. As a result, small property rights remain vulnerable and unstable within China’s property market.


Alternatively, if house prices continue to increase, the reliance on small property rights will continue to increase along with the proportion of Chinese citizens in Small Property Right Housing. Although creating the opportunity to access housing, China’s property law system, which offers no legal protection for such rights, will continue to sit on a house of cards. Regardless of house prices in China increasing or decreasing, it is only a matter of time until these cards fall.


Conclusion

This article has highlighted a home truth, namely that increasing house prices has raised numerous issues for China’s property market. It has argued that the increase in house prices has led to the significant rise in small property rights. It has further argued that a real estate market that relies on such rights is unstable, due to the lack of legal protection these rights are offered. Whilst it is undeniable that high house prices have created this ‘necessary evil’,[23] it is less clear in how this issue is to be addressed. Although the CCP have taken measures to decrease house prices, greater opportunity for the legal enjoyment of property is required to restore the overall stability of China’s property market.


[1] Research into quality-controlled housing price indices in eight major cities in China, compiled by Zheng at Tsinghua University's Hang Lung Centre for Real Estate [2] Ibid. [3] S. He et al., ‘Property Rights With Price Tags? Pricing Uncertainties In The Production, Transaction And Consumption Of China’s Small Property Right Housing’ Land Use Policy 81 (2019) 424–433 [4] President Xi’s Speech at the 19th National Congress of the Communist Party of China at the Great Hall of the People in Beijing, China October 18, 2017 [5] Y. Lai et al., ‘Property Rights And Housing Prices: An Empirical Study Of Small Property Rights Housing In Shenzhen, China’ Land Use Policy 68 (2017) 429–437 [6] C. Hamnett, ‘Urban Housing in Contemporary China: a Commentary’ Cities 108 (2021) 102968 [7] G.Wan, C. Wang & Y. Wu, ‘What Drove Housing Wealth Inequality in China?’ (2021) 29 China & World Economy, Institute of World Economics and Politics 32-60, 56. [8] ‘China’s Bid To Stabilise Its Property Market Is Causing Jitters’ (The Economist, 4 Sep 2021) < https://www-economist-com.bris.idm.oclc.org/china/2021/09/04/chinas-bid-to-stabilise-its-property-market-is-causing-jitters> accessed 10th October 2021 [9] See Z.Dan & Qi Xijia, ‘China To Overhaul Housing Market’ (Global Times, 24 Oct 2021) < https://www.globaltimes.cn/page/202110/1237180.shtml> accessed 25th October 2021 [10] National Bureau of Statistics, September 2021 Report on City House Prices Index [11] S.Qiao, Chinese Small Property: The Co-Evolution of Law and Social Norms (CUP 2018) p.5 [12] S.He et al. (n 3) 424. [13] H.Liua et al., ‘Small Property Rights Housing In Major Chinese Cities: Its Role And The Uniqueness Of Dwellers’ (2018) 77 Habitat International 121–129 [14] Qiao (n 12) 98. [15] Ibid. 101. [16] L.Wang & T.Sun, ‘Capitalization Of Legal Title: Evidence From Small-Property-Rights Houses In Beijing’ (2014) 44 Habitat International 306-313 [17] Y. Lai et al. (n 6) [18] Qiao (n 12) 150. [19] Wang (n 17) 306. [20] Statement from the Ministry of Housing and Housing and Urban Rural Development, January 2013 [21] L. Sunc & P.Hoa, ‘Formalizing Informal Homes, A Bad Idea: The Credibility Thesis Applied to China’s “Extra-Legal” Housing’ (2018) 79 Land Use Policy 891–901, 898. [22] Liua et al. (n 14) 125. [23] Qiao (n 12) 5.

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