In China, the Starter Home is a Non Starter

The middle class is getting squeezed out of the country's ever-pricier housing market

Grace Du has everything going for her. The 26-year-old graduated with an economics degree from prestigious Jiao Tong University in Shanghai and landed a job as an administrative assistant at consultancy AT Kearney Inc. Her boyfriend is an engineer and, like Grace, is an only child living at home with his parents. They plan to get married, and their combined income of $1,250 per month puts them solidly in the ranks of China's middle class.

But after six months of house hunting they're still looking for something that fits their budget. ``It's a problem to find something affordable,'' says Du, who had hoped to pay around $80,000 for a two-bedroom apartment but has discovered that anything in central Shanghai runs about triple that. ``Either the prices are very high or the location is not good.''

In cities such as San Francisco, New York, and London, the dearth of affordable housing is a well-rehearsed and painful theme. Now the topic is dominating the conversations of middle-class families in Beijing, Shanghai, and many smaller urban areas across the mainland. First-time home buyers, especially, are getting squeezed out of the market, and people with otherwise solid earning credentials are unable to pay housing prices that have often doubled in the past four years. Web sites for college grads and newlyweds are filled with laments by frustrated apartment hunters who face many more years living with their parents because they can't afford to move out.

The situation is perilous to a nation trying to build a middle class -- and could aggravate already simmering social tensions. In the first quarter, $23.6 billion was invested in residential development in China, but only $775 million of that went into low-cost housing. The result has been a growing scarcity of affordable homes, and, many feel, tangible proof of the widening gap between rich and poor in China. It has also created a surge in lending to the most aggressive developers, which Beijing fears might hurt its banks if prices crash and many of these loans sour.


  Time for a crackdown. In early June, Beijing rolled out a raft of decrees aimed at containing the luxury market and funneling more funds into affordable housing. The measures boost the minimum down payment to 30%, up from 20%, on homes larger than 900 square feet. To discourage rapid flipping of apartments, a tax of 5.5% is being slapped on the entire purchase price of any property sold within five years, up from two years. And a new rule bans sales of government-owned land for detached houses, a big setback to developers that have carved out dozens of suburban enclaves with names such as Oasis Riviera and Rancho Santa Fe.

The rules are starting to bite. In March, when developer CapitaLand Ltd. sold a batch of high-end townhouses in Shanghai, demand was so great that the company decided to hold a lottery for the next phase. But just four days before the June 9 drawing, only 10 buyers had registered for a chance to buy the final 25 units. ``The new measures have made people hesitant,'' says Ivy Zong, a CapitaLand sales representative.

Whether or not such policies will result in more affordable housing remains to be seen. One principal reason builders have concentrated on the high end is that land, which is almost always bought from the government, is pricey, typically accounting for nearly half the cost of a residential development. ``If the government wants to reduce the cost of housing, it needs to reduce the cost of land,'' says Michael Hart, head of residential research at Jones Lang LaSalle Inc. (JLL) in Shanghai. Until that happens, China's young people may be seeing a lot more of mom and dad than they'd really like.

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