The Struggle Is Real: Foreigners Buying Real Estate in China

For the past decade the housing market in China has been performing well, and homeownership has increased 80%, a record high.  As the growing number of Chinese has been buying property, foreigners planning to live long-term in China have also become interested in buying property of their own.  Unfortunately, regulations and laws under the Chinese government have made purchasing real estate in China very difficult for foreigners.  However, China’s slowing economy has changed the government’s approach to this.

Chinese Property Law & Obstacles Facing Foreigners

Chinese property law has undergone many developments with the most important being the creation of the 1982 Constitution.  This document stated provisions for the “socialist public ownership” of any means of production.  This means that the land in China belongs to the state and the collectives.  Property investors may only obtain the right for land use through a 70-year term land lease.  In 2006, the government imposed a rule that prohibited foreign citizens working and living in China for less than a year from purchasing a home.  This rule was established after an abundance of foreign home buying and property investment.  The most recent development, in 2007, was the introduction of a new property law that for the first time protected the interests of private investors equal to national interests.  Although this law was created, it is also stated that the Chinese government is entitled to make compulsory purchases of property for the purpose of new construction.  This is typically a risk for older properties.

The large number of Chinese regulations and laws has made property buying very strenuous for foreigners.  In general, foreigners are only permitted to buy their own property after having worked or studied in China for at least a year.  Foreigners are only allowed to own one property in China and it must be used for dwelling purposes only.  Commercial or industrial property may only be purchased after a company has been incorporated in China.  There are also several extra taxes and fees involved for a foreigner, making the transaction even more difficult.  In addition to a deed tax, city maintenance and construction tax, legal fees and a transfer fee, foreigners must also pay a notarization fee.

The Slowing Economy & Real Estate Bubble

Real estate in ChinaChina’s economy has become the second largest in the world.  With its rapid growth in the past three decades, it was anticipated that it would eventually slow down.  According to the Wall Street Journal, the growth rate slow-down hit 6.9% for 2015, making it the slowest expansion in decades.  

China has a huge debt problem.  China also has control of its banks allowing China to power its economy through the financial crisis.  The country’s total debt has increased 100 percentage points since 2008.  One area that the Chinese government substantially supported with loans was development in construction and real estate.  According to Fortune, the real estate sector accounts for between 25% and 30% of China’s GDP.  Due to this, property developers owe a large portion of China’s debt.  Residential developments were rapidly built in large numbers.  More than 60 million apartments now sit empty because of the high purchase costs and yet, potentially rich foreigners still have strenuous restrictions on property buying.  As a result of the many unoccupied residences, developers have heavy repayment burdens.  The rapid growth of China’s economy may have created the largest housing bubble in history.

Government Response

The only way to restore the Chinese economy is to revitalize the real estate industry.  In a move to boost the industry, the government has made several changes to encourage both foreigners and locals to invest in real estate.  China has become more lenient with rules and restrictions on property sales to foreigners.  Foreigners no longer require proof of living or working in China for at least a year.  Limits on the number of properties purchased by foreign individuals and businesses are being ignored.  This means that foreigners may now purchase properties for many purposes.  Housing prices started dropping, with a decrease of 4.5% in 2014.  Additionally, China’s cut on interest rates and the devaluation of the yuan may also likely attract investors.

Although the Chinese government is making changes to stimulate the economy, it will be a long process before any real noticeable results.  The real estate sector is only one portion of the problem and foreign investors currently only make up a small percentage of property owners in China.  However, removal of the restrictions will encourage more foreign investors.  Unfortunately, the slowing economy has made it both easier and less desirable for foreigners to buy real estate in China.  For  individuals and companies that have specific reasons for buying real estate in China, I would recommend the purchase as long as the decision is well thought-out and the location of the property is desirable and in a populated area.

Ilse Falk