Demand for Urban Housing

Chapter-III 60

CHAPTER - III Demand for Urban Housing Urban housing demand is a reflection of households desire to live in cities. Global demand for housing is expected to increase about 2.5 per cent per annum through 2011, generating the construction of approximately 60 million new housing units. 1 More than 2 billion people will be added to the number of urban dwellers in the developing countries over the next 25 years. 2 This implies an unprecedented growth in the demand for housing, water supply, sanitation and other urban infrastructure services. Close to 3 billion people, or about 40 per cent of the world s population by 2030, will need to have housing and basic infrastructure services. This translates into completing 96,150 housing units per day or 4000 per hour. 3 The housing crisis is already with us. Providing these services to new residents will be essential if this additional population is not to be trapped in urban poverty, poor health and low productivity. It is an urban problem with significant macroeconomic consequences. The factors which affect the demand for housing are not the same as the factors affecting other consumer goods. Housing is one of the most durable and expensive asset which provides many kinds of services such as shelter, security, comfort, feeling of independence, social status and privacy. Housing stock may be defined as the fixed capital stock that is accumulated for the purpose of sheltering the population. On the other hand housing services can be thought of as the services implied by the use of the housing stock. The distinction between the housing stock and the flow of services it yields over a period of time provides the basis for two measures of value. These are rent and price of the housing unit. Rent is the payment made for a flow of services received over a specified period of time and price is the capital value associated with a particular unit of the stock. 4 The aggregate demand for housing is determined by many factors such as income, price, number of persons in the household, travel time to reach work place, age structure of the members of the household, real wealth of the household, rate of 60

growth of population, rate of household formation, rate of urbanization, etc. 5 The most important factors that really affect the demand for housing are the price of a dwelling unit and purchasing power of the buyer. The aggregate supply of urban housing is related to the prices of quantities of inputs of factors of production. The most important one is land. The housing supply is assumed to be a function of the cost of land and building construction, tenure and availability of funds. 6 Demand for Urban Housing:- The major factors that are driving the housing demand in India and China are the growth of population and rising urbanization, the growing number of nuclear families causing a perceptible lowering of the household size and increasing affordability has driven households to invest in larger houses, thereby increasing area requirements as they shift into the higher income class. Population growth has a direct bearing on the requirement for housing units and, through this, on Floor Space Area (FSA) requirements. The table 3.1 below summarizes the independent (all other things remaining constant) impact of each of the demand driver on the overall housing demand. 7 Table 3.1:-Demand drivers and impact on housing demand Demand Units Floor Space Area Driver Demand Demand Population growth Urbanization Nuclearisation Affordability Source:- CRISIL Research 2006 1. Growth of population and rising urbanization:- The most important factors which affect the demand for housing is the rate of growth of population and the rising urbanization. Population growth is putting pressure on housing provision in India and China. Out of the ten most populous countries, six are Asian countries where China and India rank first and second respectively. According to table 3.2 India was home for 1,009 million people whereas 61

China was for 1,275 million people in 2000. In both the countries the population is expected to increase further and will touch 1409 million in India and 1485 million in China in 2030. Rising slums, squatter settlements in cities is a sign of housing demand not being met through formally housing stock: Table 3.2: Urban Population in the 10 Most Populous Countries 1950 2000 2030 Country Per cent PopulationPer cent Population Per cent Population Urban (mn) Urban (mn) Urban (mn) 1 China 12.5 555 35.8 1275 59.5 1485 2 India 17.3 357 29.0 1009 40.9 1409 3 USA 64.2 158 77.2 283 84.5 358 4 Brazil 36.5 54 81.2 170 90.5 226 5 Indonesia 12.4 79 41.0 212 63.7 283 6 Nigeria 10.1 30 44.1 114 63.6 220 7 Pakistan 17.5 40 33.1 141 48.9 273 8 Mexico 42.7 28 74.4 99 81.9 135 9 Japan 50.3 84 78.8 127 84.8 121 10 Bangladesh 4.3 42 25.0 137 44.3 223 Source:- United Nations (2002) Urbanization in developing countries is occurring at intense speeds. The increase in urban population is not due to the extension of the boundaries of urban areas but also due to the increase in the population of the existing urban areas. This increase has resulted in greater demand for housing. Devendra Gupta has mentioned in his book that the increased demand for housing is met in several ways:-through new constructions, through more units created from the existing housing stock, with house owners moving in to smaller apartments and through sub tenancy and through squatting. 8 According to the United Nations Population Fund (UNFPA), India is getting urbanized at a faster rate and by 2030 more than 41 per cent of the country s population would be living in urban areas. 9 According to table 3.3 given below, 29 per cent of India s area was urban in 2005 as against the 41 per cent of Chinese urban 62

area. The urban population of India and China were estimated to stand at 316 million and 536 million respectively in 2005. During the last sixty years, post independence the population of India has grown two and a half times, whereas urban India has grown by nearly five times. By 2050, almost 875 million people or 54 per cent of India s estimated population in 2050 will live in urbanized cities, according to a report, Opportunities in an Urbanising World, Credit Suisse. 10 China leads the urbanization race worldwide. It is estimated that by 2050, the urban population is likely to reach 1-1.1 billion, with an urbanization level as high as 75 per cent. 11 Table 3.3: Urbanization Trends in Asia, 1950 2030 GDP per capita (PPP, US$) 2003 Population (million) 2005 Urban Population (million) 2005 Proportion Urban Estimated Increase in Urban Population (%) (%) (%) (million) (%) 1950 2005 2030 2005 2030 2005 2030 World 6,453.6 3,172.0 29 49 61 1,772.7 56 Asia 3,917.5 1,562.1 17 40 55 1,102.2 71 Malaysia 9,512 25.3 16.5 20 65 78 10.8 66 Thailand 7,595 64.1 20.8 17 33 47 14.6 70 PRC 5,003 1,322.3 536.0 13 41 61 341.6 64 Philippines 4,321 82.8 51.8 27 63 76 34.8 67 Sri Lanka 3,778 19.4 4.1 14 21 30 2.4 59 Indonesia 3,361 225.3 107.9 12 48 68 80.0 74 India 2,892 1,096.9 315.3 17 29 41 270.8 86 Viet Nam 2,490 83.6 22.3 12 27 43 24.5 110 Pakistan 2,097 161.2 56.1 18 35 50 79.3 141 Cambodia 2,078 14.8 2.9 10 20 37 5.8 197 Bangladesh 1,770 152.6 38.1 4 25 39 48.4 127 Lao PDR 1,759 5.9 1.3 7 22 38 2.3 177 GDP = gross domestic product, Lao PDR = Lao People s Democratic Republic, PPP = purchasing power parity, PRC = People s Republic of China. Sources: - United Nations, World Population Prospects: The 2002 Revision; World Urbanization Prospects: The 2003 Revision; and United Nations Development Programme, Human Development Report 2005. 63

The rapid urbanization in many developing countries over the past half century seems to have been accompanied by excessively high levels of concentration of the urban population in very large cities. The increased number of mega cities due to urbanization has further worsened the problem of housing demand. Twenty years ago, there were 245 mega-cities around the world. Today, there are 375. 12 Today, developing countries have twice as many mega-cities as developed countries. By the year 2015, an estimated 40 per cent of the world s urban population will live in megacities. 13 Of Asia s mega cities, three are in India and two in China. Newcomers Davao and Cebu are growing far more rapidly and may achieve mega city status within the next ten years. Table 3.4:-Asia s Mega Cities (population in million) City Population Mumbai, India 18,2 Delhi, India 15,0 Shanghai, China 14,5 Kolkata, India 14,3 Jakarta, Indonesia 13,2 Dhaka, Bangladesh 12,4 Beijing, China 10,2 Manila, Philippines 10,7 Source:- UN DESA 2006 Urbanization in Asia involves around 44 million people being added to the population of cities every year and that many Asian cities are doubling in size every 15-20 years. The evidence on the population growth of urban centers suggests that medium-sized cities in the order of 500,000 to 2 million will experience the highest urbanization rates in the future.14 It may be seen from the Table 3.5 which shows the city size and population growth of China and India in 2000, the number of cities with over a million population reached 93 and 33 respectively. 64

Table 3.5: City Size and Population Growth in China and India (For Capital Cities and Urban Agglomerations with 750,000 Persons or City Size 0 0.5 million 0.5 1 million 1 5 million Over 5 million Cities (No.) 126 127 93 4 PRC More in 2000) Av. Annual Growth Percentage 2005 2010 1.80 2.03 1.25 0.77 Percentage 2010 2015 1.91 2.08 1.45 1.04 Cities (No.) 157 45 33 7 INDIA Av. Annual Growth Percentage 2005 2010 2.04 2.45 2.79 2.30 Percentage 2010 2015 2.18 2.36 2.52 2.12 Av. = average, no. = number. Source:- UN, World Population Prospects: The 2002 Revision and World Urbanization Prospects: The 2003 Revision. Large cities have been the focus of both population and economic growth. Each country now has three mega cities with populations over ten million: Beijing (12.4 million), Shanghai (15.4 million), and Chongqing (15.2 million) in China; and Mumbai (16.4 million), Kolkata (13.2 million), and Delhi (12.8 million) in India. China has five additional cities with populations over 5 million (Guangzhou, Tianjin, Xi an, Chengdu, and Wuhan), and India has three such cities (Chennai, Hyderabad, and Bangalore). Overall, China has 174 cities with populations of over a million, and India has 35 cities that large. 15 has dramatically increased demand for land for housing. The rapid growth of both Chinese and Indian cities It is the smaller and intermediate-sized cities that are frequently experiencing rapid population growth and these are also often the most poorly resourced to accommodate this growth. Even within cities, growth is not uniform and has aggravated the demand for housing. What makes the urbanization problem particularly acute is that developing economies of China and India are exhibiting a far steeper rate of urbanization. Population shift from villages to cities is caused partly due to most economic development coming from the non-agrarian sector and also because prosperity tends to displace people. 65

Urbanization has twin impact on housing demand. On the one hand, it reduces the area per household, and on the other, there is an increasing need for more nuclear families, leading to the formation of more number of households. 2. Nuclearisation:- Nuclearisation refers to the formation of nuclear families from joint families. Nuclearisation is primarily driven by employment-related migration and the changing social structure could also be a factors. This migration is predominantly to urban areas. Nuclearisation, like urbanization, also has twin impact. It reduces the area per household, but increases overall household formation, thereby increasing the demand for housing units. The fact that urban house prices are higher also leads to buying smaller areas in comparable income categories. The growing popularity of nuclear families in India has decreased the average household (HH) size, leading to an increase in the number of households. Graph 3.1 given below shows that the average HH size in India has declined from 5.4 persons per HH in 1981 to 5.1 persons per HH in 2001. Graph 3.1:-Decreasing Household Size in India Average Household Size Source:- Real Estate Market & Opportunities In 2001, there were roughly 192 million households in India, about 40 million more than those in 1991. 66

Table 3.6:-Housing Stock, Households and Housing Shortage in India (Figures in Million) Indicators 1991 2001 Rural Urban Total Rural Urban Total (1) Households 111.6 39.7 151.3 138.3 53.6 191.9 (2) Housing Stock 108.5 39.0 147.5 135.1 52.0 187.1 (3) Over-crowding/ 3.1 0.7 3.8 3.2 1.6 4.8 Difference between (1) & (2) (4) % in housing shortage 23.1 15.6 21.2 27.6 45.7 31.8 Source:- Census of India (2001), Registrar General of India The data on households and housing stock for India are presented in the table 3.6 given above. Over-crowding arose due to increase in the number of households than the number of housing stock. This led to an increase in the demand for housing. Especially, the incidence of over-crowding has increased manifold in urban areas. Indeed, the congestion factor can also be worked out by utilizing the data on household size and the average number of room available to every household by Monthly Per Capita Expenditure (MPCE). Larger the household size in comparison to the availability of room, larger will be the congestion factor. Table 3.7:-Average Household Size and Average No. of Rooms Available in India Source:- Report of the Technical Group (11th Five year Plan: 2007-12) 67

From the table no. 3.7 we can see that the higher is the expenditure class, lower is the household size and larger is the number of rooms available. This is understandable as the households in higher expenditure classes tend to have only the nuclei families while the EWS i and LIG ii families have joint family system. We can also see that the households in high expenditure class have larger number of rooms than the couples or even the family members. They have surplus housing at their disposal. Congestion factor, however, is severe at the lower expenditure classes. In the EWS and LIG groups a high congestion factor can be inferred from the fact that the number of family members is much larger than the number of rooms. On the other hand, the congestion factor is nonexistent for average households in MIG iii and HIG iv categories, since the number of rooms available, after catering to the married couples within the household, is larger than the number of other family members. China also faced the same problem. The table no.3.8 given below shows that the increase demand for housing in urban areas led to the steep decline in the average household size; the household size in 2003 was only 86 per cent of what it was in 1990. 16 Table 3.8:- Selected Characteristics of Population and Urban Households in China: 1990-2003 Characteristics 1990 1995 2000 2002 2003 Urban population (in million) % of urban population Urban households (in million) 302 352 459 502 524 26 29 36 39 41 86 109 147 165 174 Average household size 3.50 3.23 3.13 3.04 3.01 Source:- Farhat Yusuf, Ping Zhao, Patterns of Urban Households in China, 1990-2003 i EWS- economically weaker section ii LIG-Lower income group iii MIG-middle income group iv HIG-high income group 68

Demand for housing is also influenced by house prices. In the last 2 years, housing prices have spiraled up in India and China, and would continue to do so as pressure of population and nuclearisation of families increases. The nuclear families will have no other option except to go for a small household size. Graph 3.2:-House prices soar in India and China House prices, 2001=100, local currency Source:- Real Estate Investments in China and India, Deutsche Bank Research Average house price growth was 10 per cent in Beijing, 13 per cent in Shanghai and almost 16 per cent in Mumbai. 17 The tremendous growth in house prices was another reason for the small household size. 3. Affordability:- The other factor on which the demand for urban housing depends is affordability. Affordability is mainly composed of the following elements (a) increasing income levels and (b) affordable means of financing. (a) Increasing income levels: - Housing today is now at one of its most affordable levels in Indian history. Estimates show that affordability (i.e. the ratio of the price of a residential property to 69

the annual income of the borrower) has improved significantly. For instance, for a typical suburb in Mumbai city, in 1995, it required about 22 times a borrower s total annual income to purchase a house, while in 2006, this ratio dropped to 5 times (HDFC, 2006). 18 This increased affordability can also be attributed to the rapid rise in household earnings over the past decade. The personal disposable income has grown manifold in the past one decade. The following table 3.9 gives a clear picture of the disposable income in India from 1999 to 2008. Table 3.9:- Personal Disposable Income (1999-2008) of India Years Personal Disposable Income (Rs. Crore) Percentage change over the previous year v 1999-2000 1,617,965-2000-2001 1,773,250 9.6 2001-2002 1,954,839 10.2 2002-2003 2,064,839 5.6 2003-2004 2,282,148 10.5 2004-2005 2,495,015 9.3 2005-2006 2,806,427 12.5 2006-2007 3,182,710 13.4 2007-2008 3,592,172 12.9 Source:- Press Information Bureau, Government of India (30th January, 2009) The table shows that the personal disposable income has grown two times in 2008 than the income in 2000. Several studies have indicated that salaries in India have been increasing by an average of 10-15 per cent on a year on- year basis. 19 This has increased the affordability of homes in spite of higher property prices and has created more demand for housing. There has been a steady movement of households into higher income categories. The movement is more pronounced in the high-income categories. Urban households with incomes above Rs 500,000 are further expected to grow by 12 per cent in the next 5 years on an increased base. Rural households, in the same income v Percentage change over the previous year= Present year disposable income previous year disposable income X 100 Previous year disposable income 70

class, are expected to grow by 7 per cent. 20 (See the Graph no. 3.3 given below). The twenty Indian cities vi together account for 10 per cent of India s population, but generate 31 per cent of disposable income. 21 By 2016, more than half of households in the twenty cities will be middle class, while the high-income vii segment could more than triple. Income distribution has changed dramatically in certain cities. Surat's middle class has more than doubled between 2004-5 and 2007-8, while the lowincome category has shrunk by over a third. The high income category has expanded the fastest in Lucknow, Jaipur and Nagpur. 22 Household income levels for Mumbai and Delhi (as well as Chandigarh and Surat) in 2007-8 have crossed the Rs. 4 lakh mark. This makes income per capita in Mumbai and Delhi well over double estimates for all-india GDP per capita, and roughly equivalent to China s 2007 per capita income levels. 23 Graph 3.3:- Increase in Income in Urban and Rural Areas In India Increase in Income Urban and Rural 2002-2006 Increase in Income Urban and Rural 2007-2011 Source:- CRISIL Research < 2 Lacs 2-5 Lacs > 5 Lacs vi Twenty cities of India are Amritsar, Chandigarh, Jalandhar, Ludhiana, Delhi, Faridabad, Jaipur, Lucknow, Kanpur, Ahmedabad, Bhopal, Pune, Nagpur, Surat, Mumbai, Kolkata, Hyderabad, Bangalore, Chennai, Coimbatore vi Low-income class= incomes below USD 975 per annum a growing middle class= incomes between USD 975 and 4,675 per annum and a small, affluent/rich class= incomes above USD 4,675 per annum (according to UNITED NATIONS HUMAN SETTLEMENTS PROGRAMME) vii low-income class= incomes below USD 975 per annum a growing middle class= incomes between USD 975 and 4,675 per annum and a small, affluent/rich class= incomes above USD 4,675 per annum (according to UNITED NATIONS HUMAN SETTLEMENTS PROGRAMME) 71

In China also income growth has been strong in the last ten years. Underlining increased affordability. Since 1996, average annual income growth has been strongest in the principal cities Beijing (11 per cent) and Shanghai (10 per cent). 24 The table 3.10 given below shows that the growth of per capita annual disposable income of urban household has increased to 14.5 per cent in 2008 from 7.9 per cent in 1999. Table 3.10:-Per Capita Annual Disposable Income of Urban Household in China (Y) viii Year Per Capita Annual Percentage growth Disposable Income of Urban Household (Y) 1999 5,854.0 7.9 2000 6,280.0 7.3 2001 6,859.6 9.2 2002 7,702.8 12.3 2003 8,472.2 10.0 2004 9,421.6 11.2 2005 10,493.0 11.4 2006 11,759.5 12.1 2007 13,785.8 17.2 2008 15,781.0 14.5 Source:- China Statistical Yearbook 2008 The continued economic progress in China has increased household incomes and boosted housing demand in the long run. The ratio of urban personal annual income per capita relative to the average selling price of residential properties, in terms of Chinese yuan per square meter, rose to 3.9 in 2007 from 3.6 in 2004, indicating that a family is more likely to be able to afford the same property than three years ago. 25 The ratio of GDP per capita to house prices also stepped up steadily during the same period. viii 1 CNY = 7.12 INR this is the current exchange. 72

Graph 3.4:- Ratio of income per capita to house price in China Source:- China Statistical Yearbook, Hang Seng Bank Naturally as income levels increase and more people move into the next higher class, they will have more disposable income. From Graph 3.5 we can see that in 2005 the urban populations of India and China were predominantly from lower income groups. China in particular has a much higher proportion of households living on poor/deprived levels of income. By 2025 these will have largely been supplanted by upper-aspirant/seeker households who will account for over half the urban population. Graph 3.5:-Distribution of Urban Households by Income Group in China and India Source: -Mckinsey Global Institute Analysis (2006, 2007) 73

In China the top two income groups are expected to account for less than 10 per cent of the urban population in 2025, in India they will be nearly a third. 26 By 2025 while China may have a much larger urban middle class than India overall, the later could have more highly affluent households, both in absolute and relative terms. ix This is all due to large scale migration from rural to urban areas coupled with urban incomes growing more rapidly than the economy as a whole. This rapid rise in household earnings has increased affordability over the past decade. (b) Affordable means of financing:- Besides rising incomes other factors that have increased home affordability are: easier access to mortgage finance, longer loan tenures, higher loan-to-value ratios and tax incentives. Though home loan rates have increased by almost 200 basis points x in the past two years they are still 45 per cent cheaper than what they were in March 2001. Tax savings on interest payments and principal repayments per annum on mortgage loans have also made home purchases more attractive. 27 The boom that we have seen recently in the property market in India has been much helped by the banking industry. Residential property is one of the costly assets which an ordinary man cannot afford to buy in cash. People buying apartments directly with cash can hardly be seen. Most of the home buyers around the world like to purchase homes only with bank s financial scheme. There is an uprising in the residential properties in all the metropolitan cities in India. During 1999-2002, two landmark events happened. First, home loan rates started declining. This not only reduced the interest outgo but also the EMIs (Equated Monthly Installments), allowing people to go for larger and better homes. In order to increase the affordability, the government has offered tax incentives to individuals who opted for home loans. The recent thrust given by the Government to the housing and housing finance sector and various concessions offered by the government to the people have had the desired effect. The demand for housing has picked up. This is evident from fact that total home loan disbursement by Banks and Housing Finance Companies has risen from ix In terms of the highest income group, Merrill Lynch, Cap Gemini (2007) estimated that there were 100,000 High Net Worth Individuals (HNWI) in India to 345,000 in China, but that this group has been growing more rapidly in India than in China. x basis points: - A basis point is the smallest measure used in quoting yields on fixed income products. The important thing to understand is that one basis point is equal to one one-hundredth of one Percentage point (0.01%). Therefore, 100 basis points would be equivalent to one full per cent. 74

Rs. 29359.29 crore in 2001-02 to Rs. 51672.7 crore in 2002-03 witnessing a phenomenal growth of 76 per cent during this period. 28 Table 3.11 gives a clear picture of home loan disbursement in India from 1999-03. Table 3.11:- Home Loan Disbursement in India (in Rs. Crore ) Source: - National Housing Bank The impact that lower interest rates have had on home loan disbursement can be seen from the graph no. 3.6 given below: Graph 3.6:- Home Loan Disbursement vs Interest Rates in India Source: -Survey On the Indian Housing Finance Sector With the introduction of floating rate loans xi in 1999-2000, loans of 20 and 30 years tenure and the entry of new, aggressive players such as ICICI Bank, Standard xi Floating rate loans- Type of loan whose interest rate (and, therefore, monthly installment amount) fluctuates according to the rise or fall in the market interest rates. 75

Chartered and HSBC, getting home loans became easier. 29 All this brought in a new paradigm of affordability in housing. The single-most important factor that helped people to buy a house was the availability of mortgage at attractive interest rates. Despite the intense pace of growth in housing finance over the past five years in India, mortgage penetration as a percentage of GDP remains low, at four per cent. This is extremely low indeed compared with countries such as the USA and the UK, where the combined value of mortgages passes 60 per cent of GDP. Even when compared with other Asian countries, India s performance is weak. (See table 3.12 given below). This is further corroborated by the fact that despite the recent, impressive rate of growth in the housing finance sector, financing through the organised/formal sector continues to account for only 25 per cent of total capital expenditure in housing in India. 30 Table 3.12:- A Cross-Country Comparison of Mortgages to GDP Ratios Country Mortgages to GDP Ratio (%) India 4 China 11 Korea 14 Malaysia 22 Hong Kong 50 Germany 52 USA 64 UK 72 Source:- European Mortgage Federation, HDFC, 2006 There is a preference amongst the majority of Indian households to own a home rather than opt for renting. The tendency to own a house has shown an increasing trend among the urban households. The table 3.13 given below shows the tenure status in the urban area. 76

Table 3.13:- Tenure status in Urban Area in India Years Owned (%) Rented (%) 1961 46.2 53.8 1971 47.1 52.9 1981 53.5 46.5 1991 65.9 34.1 2001 71.5 28.5 Source:- Census of India From the table 3.13 we can see that percentage of houses owned by the urban households has increased to 71.5 in 2001 from 46.2 in 1961. On the other hand there is a decline in urban household residing in rented houses from 53.8 per cent in 1961 to 28.5 per cent in 2001. It shows a drastic change in the tenure status in urban areas in the last four decades. In urban areas, the trend has distinctly changed as more people have gradually begun to opt for ownership as against rental housing. The reasons are twofold: first, rent-control laws in urban areas have discouraged new rent-based units from coming into the market. Secondly, an increase in available housing finance options over the years has enabled more people to buy a home. This has affected the demand for housing. Today home loans are more affordable and available at better terms. Housing finance companies and banks are introducing various schemes to attract the borrowers. Indian home loan market has witnessed a distinct shift in the age profile of borrowers. Few years back, a large number of borrowers used to be in their late 30s and 40s but today greater number of borrowers is in their mid 30s. Another factor which has affected the affordability is the higher loan to the cost ratio. Borrowers can today raise up to 100 per cent or in some cases even 110 per cent also (in which case lenders provide financial assistance for the complete property value, stamp duty, registration and additional 10 per cent as personal loan) of their borrowing requirements from the lenders. 31 Easy availability of finance has increased home affordability. The definition of housing affordability by the shelter poverty measure, uses a sliding scale to reflect that upper income group and small households can afford to spend much more than 30 per cent of their incomes on housing and still have enough 77

income left over to satisfy other basic needs, whereas for extremely low income households to pay even 10 per cent of their incomes on housing costs may be forced to forgo essential medical care and healthy food. 32 In China, the desire to own property is very strong among the populace and they are likely to set aside a substantial amount of their income, as high as 50 per cent, to pay for the mortgage repayment. While promoting urban economic reform in 1980 Deng Xiaoping said, Urban residents should be able to buy or build their own housing units...rents must be adjusted...so that people will see the benefit of buying housing. When rent is increased, subsidies should be given...housing construction...by private entities should be allowed." 33 Chinese housing policies underwent a series of changes in the 1990s. But the most interesting one happened in 1998, according to the policy, the practice of providing houses by State Owned Enterprises is stopped and government began to encourage workers to buy their own homes. Since the land is nationalised, home purchasers could hold legal rights to occupy the building for a specific period (typically the tenure for residential property is 70 years; commercial building 30-50 years; and industrial property, 20 years) and could transfer the title to another party. 34 People s Bank of China issued the guidelines to others banks in the country on granting housing loans. The new policies speeded up the privatization of residential housing and led to the full-scale development of the primary mortgage market. By the end of 2005, the majority of the residential units were traded at market prices, and the subsidized segment accounted for less than 10 per cent of the private housing market. Table 3.14:- Year to Year Growth of Real Estate Loans and Investments in China 1999 2000 2001 2002 2003 2004 Growth of real estate 39 117 35 42 37 23 loans (%) Growth of real estate investment (%) 14 19 27 24 30 28 Source:- Chang Jian Sheng, 2005 It is evident from the above table 3.14 that the growth of real estate loans and investments are in an increasing trend though the year 2000 witnessed a huge hike 78

comparing to 1999 in terms of loans. Commercial banks are currently the dominant lender in the primary mortgage market, supplemented by the Housing Provident Fund (HPF) scheme established in 1990. The Housing Provident Fund (HPF) scheme requires compulsory saving by employees (plus contributions from employers) for entitlement to a housing loan in the future. Currently, HPF loans represent approximately 12 per cent of total mortgage balances outstanding. This scheme has played a more significant role in the demand for affordable housing. Shanghai was the first Chinese city to implement the HPF scheme as a financial measure of the housing reform. The HPF was proposed by the Shanghai government in 1991. In 1994, other cities in China have adopted a similar policy. The savings belong to employees and should only be used for home purchase, self-building, and renovation of employees housing units. Table 3.15:- National Housing Provident Fund contribution and usage in China 2000* 2003 2004 2005 Number of account holders (10000) 6300.0 6317.7 6138.5 6329.7 Cumulative contribution (CNY bn) 216.9 565.5 740.0 976.0 Cumulative contribution per holder (CNY) 3442.5 8951.1 12055.5 15418.6 Contribution in year (CNY bn) NA NA 183.7 235.9 Contribution in year per holder NA NA 2993.2 3727.2 Total account balance (CNY bn) NA 377.8 489.4 626.0 Account balance per holder NA 6677.8 7972.7 9889.1 Cumulative withdrawal (CNY bn) NA NA 250.6 350.0 Withdrawal in year (CNY bn) 17.4 NA 73.1 99.3 Cumulative HPF mortgage extended (CNY bn) Cumulative number of mortgages extended (10000) 78.5 234.4 340.7 459.9 NA NA 425.5 523.5 Mortgage extended in year (CNY bn) NA NA 94.3 119.5 Average size of new mortgage (CNY) NA NA NA 121969.4 Note: NA: not available. *--The number of account holders for 2000 is assumed to be 63.0 million. Source:- Compiled from Ministry of Construction (2004 and 2006), Financing Home Purchase in China Housing Studies, Vol. 22, No. 3, 409 425, May 2007 79

From Table 3.15 it can be seen that at the end of 2005, a total of 63.3 million workers had joined the HPF. However, this represents only slightly more than half of the total urban workforce. In fact, the number of HPF account holders stayed at almost the same level between 2003 and 2005, even though the scheme was extended to include all workers in urban areas. The HPF has experienced quite phenomenal growth in recent years. Cumulative contributions increased more than three-fold between 2000 and 2005, from CNY 216.9 billion Yuan to CNY 976.0 billion Yuan. Only in the past few years was a substantial increase seen in the size of the annual and cumulative contribution. In 2005, the annual contribution reached CNY 235.9 billion Yuan. In 2000, for the nation as a whole only CNY 17.4 billion Yuan was drawn from the HPF accounts to help finance home purchase. In 2005, the amount withdrawn increased to CNY 99.3 billion Yuan. At the end of 2005, the cumulative amount of withdrawal stood at CNY 350.0 billion Yuan, which is equal to 35.9 per cent xii of cumulative contribution. In addition to its savings function, the HPF also acts as a home financier. Again, its role as a mortgage lender was quite small before 2000. At the end of that year the cumulative amount of HPF mortgage loan granted stood at only CNY 78.5 billion Yuan, but more recently, more HPF contributors are making use of HPF loans. The cumulative amount of loan extended increased more than five-fold to CNY 459.9 billion Yuan by the end of 2005, and the cumulative number of receivers of HPF mortgage loans reached 5.23 million. In 2005, some 1 million purchases or approximately 20 per cent of all housing transactions were financed by HPF loans. The average loan amount stood at CNY 121,969 Yuan. Since the end of welfare-oriented urban home distribution system in the late of 1990s, China s home mortgage business has witnessed a tremendous growth and currently it is playing as the most important funding resource for urban residents home purchase. xii 35.9 per cent=( Cumulative withdrawal Cumulative contribution ) 100 i.e. (350 976) 100 80

Table 3.16:- National growth in mortgage loans to individuals in China, (1997 2004) Year Mortgage loan extended in the year (CNY billion) Mortgage loan balance (CNY billion) Mortgage loan balance as percentage of GDP (%) Mortgage loan extended as percentage of total bank loan extended in the year (%) Mortgage loan balance as percentage of total bank loan balance (%) 1997 NA 19 0.26 NA 0.25 1998 29.5 48.5 0.62 2.54 0.56 1999 84.6 133.1 1.62 11.73 1.42 2000 202.2 335.3 3.75 35.87 3.37 2001 223.4 558.7 5.74 17.26 4.97 2002 267.1 825.8 7.85 14.07 6.29 2003 352.8 1178 10.05 12.74 7.41 2004 422 1600 11.72 22.97 9.02 Note: NA: not available. Source:- China Statistical Yearbook (NBSC, various years), Almanac of China s Finance and Banking 2004, p. 602 and p. 623. Mortgage loan balance data for 1998 and 2004 were given in http://www.adb.org/ PRCM/speech-pres/moc-hou.pdf. Table 3.16 provides information on the growth in personal mortgage loans by commercial banks during the period 1997 2004. It can be seen that prior to the housing reform of 1998 the mortgage loan business was very small, but it has since experienced phenomenal growth. Mortgage loans share of total bank loans outstanding was 0.25 per cent in 1997, but the figure reached 9.02 per cent in 2004. In absolute terms, total mortgage loans outstanding increased 84 fold, from CNY 19 billion Yuan in 1997 to CNY 1600 billion Yuan in 2004. The amount of annual new mortgage loans extended also increased from CNY 29.5 billion Yuan in 1998 to CNY 422.0 billion Yuan in 2004. The home mortgage loan of China has developed rapidly since 1999, and attracted more and more attention due to its diversified risk and low default rate. Up to the end of 2008, the home-mortgage balance of commercial banks had reached 29.83 trillion, and its share in the total loan balance rose to 9.97 per cent from 1.42 81

per cent (year 1999-Table 17). 36 By lowering loan rates and extending payment deadlines, the citizen in China were encouraged to purchase houses with loans. In Asian countries, especially in India and China, the introduction of home loans and floating rates have become more popular among borrowers as they are of the opinion that they could enjoy lower short-term rate which is comparatively less than long term fixed rate. China is trying to commercialize the housing sector and boost housing sales by setting up housing-related banks, funds, loans and mortgages. According to the China Economic Quarterly (CEQ), about 80 per cent of urban Chinese households own their homes and only half of urban owners have taken out a mortgage. This is because 50-60 per cent of Chinese homeowners are estimated to have bought their homes during the privatisation period. 37 At that time, buyers paid prices that were below the market value, and few required mortgage finance. Graph 3.7: Housing type and tenure, China Source:- Asia Housing Review, August 2008 As shown in graph 3.7, the vast majority of people live in homes they have built themselves. In Beijing, the single most dominant form of housing is that bought during the privatization process, accounting for 28 per cent of all households. By comparison, in Shanghai, privately purchased accommodation represents the largest 82

share of housing types, at 24 per cent of all households. 38 Housing demand in the principal cities of Beijing and Shanghai is driven by an expanding population and rising incomes, which have been fuelled by economic growth. Conclusion:- The major factors that are driving the housing demand in India and China are the growth of population and rising urbanization, the growing number of nuclear families size and increasing affordability. The accelerated pace of urbanization without proportionate growth in industrialization and the rise in the level of overall economic development has brought a number of problems in the urban centers of the developing countries. The most important of these are inadequate urban infrastructure and housing, deteriorating urban environment, urban unemployment, congestion, slum proliferation, rising disparity in incomes, etc. Resultantly the urban centers in both China and India are facing the impacts of housing shortages such as increased sharing of dwellings by two or more families, increased squatting on public and private land and outright homelessness, etc. Rise in disposable income of the Chinese and Indian middle income groups has created a dramatic effect on the demand for housing across both the countries. However, the demand is expected to outstrip the supply of housing. One would expect this as with increased availability of finances has caused price of housing to increase which itself would result from constraints in housing supply. 83

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