Buying an Apartment in China

Updated:Sep 01,2014 17:30 PM

Following Deng Xiaoping's housing reform movement of the 1980s, China has experienced a remarkable boom in the commercialization of real estate. Wherever one looks, new housing construction is underway and it is estimated that more than 72 percent of all urban Chinese residents own their own homes (Luo, 2005). Although this sentiment is gradually changing among upwardly-mobile Westernized Chinese women in international cities, a recent survey conducted by the China Youth Daily revealed that almost 52 percent of more than 10,000 female respondents considered apartment ownership to be a prerequisite to marriage (Qiu, 2007). That is, the majority of Chinese women (not to mention their families) still expect their future husbands to provide them with an apartment and, recently, even a car as well.

For the majority of foreign teachers in China, especially those who are here for short-term teaching assignments, apartment ownership will not be a consideration. However, for those who marry Chinese nationals with long-term plans to remain in China, buying an apartment may not only appear to be a good idea economically, it might very well be a clear and firm expectation on the part of the bride and her family. This unit will address the realities of buying an apartment in China and will outline what is required to do so.

Understanding the Housing Market in China

For starters, and unlike property and housing ownership in America and other Western countries, all property in China is simply being leased for a 70-year period. In theory, that lease is supposed to renew automatically upon expiration but it needs to be kept in mind that the Chinese government's relatively new Ministry of Housing and Construction retains full "property prerogatives," meaning that leases can be nullified at any time if the government determines that it needs that property for any reason (Ho, 2008). In addition, the government is also entirely free to unilaterally determine how much compensation, if any, will be offered for that property in the event the land your apartment happens to be located on is reclaimed by the state. Although recent regulations give residents the right to sue the government for unfair compensation, they rarely win in court (ibid).

As is equally true of China's education system, its housing market may be among the most expensive in the world when compared to per capita income. For example, the average price of housing in New York City is $2,059 per square meter with an average family income of $72,000 per year. By comparison, the average cost of housing in Shanghai for the year 2007 was $1,160 per square meter against an average family income of $7,316 (Tu, 2008). Generally speaking, the cost of housing outside of Beijing, Shanghai, and Guangzhou will run anywhere from 1,500 to 5,000 yuan ($217 to $725) per square meter depending on location and no more than 30 percent of all new apartments can be larger than 90 square meters (970 square feet [Macintosh, 2006]).

Finally, there is much disagreement over the stability of China's housing market. Shortly following the end of the 2008 summer Olympic Games, the housing market in China fell into an unprecedented slump with housing prices dropping as much as 30 percent below pre-Game prices (Yan and Chen, 2008). Aside from a very difficult to predict market, foreigners may only purchase apartments for personal use (i.e., to live in, not rent out) and there is virtually no secondary market to speak of. That is, when the Chinese seek to buy an apartment, they will not give much consideration to anything but new construction. In addition, legal protections and real estate standards are not yet well-established and various procedures and protocols we take for granted back home in terms of, for example, due diligence, housing inspections, and secure escrow accounts simply do not exist in China.

In some cases, the transfer of the title from the developer to the buyer can take as long as three years to occur (Macintosh, 2006) and you'll need a great deal of persistence and most likely a lawyer in order to get back your deposit (typically 10,000 yuan) if the seller changes his mind for any reason. Most foreign housing experts agree that although the potential benefits can be significant, buying property in China is very risky business. At the very least, you will need to involve local Chinese who are entirely trustworthy, fully understand the market, and can scout out the most reliable deals with the least amount of foreseeable difficulties. Some might even refer to the entire process of buying an apartment in China as gambling. We know of at least two foreigners who lost several thousand yuan by unknowingly getting themselves involved in what turned out to be illegal transactions with dishonest people. Nevertheless, assuming everything does go as planned, owning an apartment in China does make sense from the perspective of freezing housing expenditures over time—a luxury that is not afforded to those who rent.

A final point worth mentioning is that housing in China is not developed in quite the same way it is in the West: The buyer is essentially purchasing what we would call an "empty shell" or an unfinished apartment. In most cases, apartments are sold with internal walls and electrical outlets in place but everything else, including doors, flooring, and bathroom fixtures will need to be built-out by the owner after purchase. Certainly, these additional major expenditures need to be factored-in when considering any purchase as they far exceed what most Westerners would refer to as normal decorating costs. The following section describes the various requirements and procedures one needs to follow in order to purchase an apartment in China.

Purchasing Requirements and Procedures
Foreigners who wish to purchase an apartment in China will first need to establish residency for a period of no less than one year. Residency can be proven by submitting work contracts or other chopped official documents.

You will need to raise at least 30 percent of the purchase price in order to receive a mortgage. China has not yet adopted procedures for measuring and reporting credit worthiness and this is precisely the type of down payment that is required of buyers in the United States who have poor or no credit.

As mentioned above, you will need to solicit the help and counsel of a local Chinese friend you entirely trust and who has an excellent understanding of the market and how to avoid and sidestep potential problems. Some even advise paying a visit to the local urban planning division to first ascertain that the government has no foreseeable plans to, for example, build a new highway through your new apartment six months after purchase. The apartment will also have to be thoroughly inspected for construction quality and an absence of structural problems.

If you are using an agent, he or she will most likely require a "good faith" deposit of anywhere from 5,000 to 10,000 yuan before making an offer. If the offer (or counteroffer) is not accepted, the agent will return the deposit. Once a final purchase price has been agreed to, the buyer will transfer the 30 percent deposit to the seller and both will sign a binding property contract. At this stage, if the buyer reneges he loses the deposit and if the seller pulls out, doing so will cost him double the deposit. As the 30 percent deposit must be paid before the mortgage can be applied for, it is obviously imperative that the buyer first ascertain that there will be absolutely no problems whatsoever in obtaining it. New properties qualify for up to a 30-year mortgage while previously owned apartments cannot be mortgaged for more than 20.

The mortgage application process for foreigners requires a lot of legwork and documentation, including a visit to the notary of the public along with a representative from the bank. There will be various administrative and insurance fees that usually do not exceed 10,000 yuan and a property tax of 1.5 percent will be due at this time. After all the paperwork is completed, the buyer receives a key to the apartment, the realtor receives a total commission of 2 percent of the purchase price paid equally (1 percent each) by both parties, utilities are then transferred to the buyer's name, and, theoretically, the deed should also be transferred at this time as well. At this point in time, a copy of the key is handed over to a contractor who will then commence refitting and decorating the apartment so that it can be inhabited in about a month or so.

In closing, if you proceed with extreme caution, do a great deal of homework, involve trustworthy Chinese friends who have a good eye for scams and cheats, and take absolutely nothing at face value, purchasing an apartment in the Middle Kingdom for personal use can be a successful and rewarding experience for those who have made the decision to stay in China for the long haul.