International Baccalaureate
Extended Essay
To What Extent Has the Government Been Effective in Balancing the Supply and Demand
of Residential Housing Units within Beijing?
Ho Kiu Cheng
May 2012
Group 4: Economics
Your IB session number (will be available in October) 000615 – ???
abstract
Table of contents
Introduction 1
Supply and Demand 2
Determinants of Demand 3
.Market Background 4
Affordability 6
Implications 7
Conclusion 8
Bibliography 9
Introduction (400)
In the past 50 years, China’s economy has experienced an unprecedented period of growth
and expansion. One particular market that has been affected by this expansion is the real
estate market. In the past twenty years, the middle class has expanded dramatically due to
the rapid industrialization led by foreign investment, a large domestic labor force, and blah
blah blah. As the real income of this group of people increases, they spend proportionally
less of their income on perishable goods such as food and water and more on
non-perishable goods such as cars and especially real estate. Because China’s urban
population density is so high, the demand for housing far outstrips the supply of real estate
in China.
The disequilibrium of the housing market is especially noticeable in the Beijing market
due to a number of different reasons. First and foremost, China’s unprecedented economic
growth combined with the decline of the western economy in the last two years has
convinced many multinational corporations to focus their resources in expanding into
China. Over the last two years the number of expatriates residing in China has increased
dramatically (research needed). Although these expatriates will rarely be looking to invest
in the market, they have been contributed significantly to the increasing rental and first
home demand and consequently the significant price increases. Secondly, the rapidly rising
prices on real estate present a prime investment opportunity which attracts rich investors.
These investors are able to afford a significantly higher quantity of houses in China than
the local middle class worker. Their high demand for real estate has accelerated the rising
prices. The situation is so terrible that the many of the Chinese middle class find that they
are no longer able to afford residential real estate in China.
The government has recognized this market failure and has implemented increasingly strict
market cooling policies throughout the last two years. Each of these policies has had some
effect on the market, but it is yet to be seen whether they are viable long term solutions.
This paper therefore addresses and evaluates the effectiveness of the government in
balancing the supply and demand in order to provide opportunities for middle class
workers to purchase a residential housing unit within Beijing.
Supply and Demand (400)
Demand is defined as the ability and willingness of people to purchase a good or service
over a given period of time. As demand for a good or service increases, price will increase
proportionately. Supply is defined as the total amount of a good or service that is provided
at any time. As supply for a good or service increases, the price for the good or service will
decrease. A market will always be moving towards price equilibrium, which is the point
where the demand for a good or service equals the supply for the good or service at a
specific price level.
A characteristic of the Beijing residential property market in the last two years is that there
has almost always been far greater demand for residential units than supply of them with
the only exception being in 2009, during the bottom of the financial crisis where supply
consistently outstripped demand. In accordance to the law of demand, the prices have been
increasing significantly as the supply of houses lags behind demand for them. The graphs
below illustrates this concept.
(placeholder)
This graph shows the consequences of excess demand and under-supply. Due to the low
supply, there is a huge excess of demand at the market price level. If this situation
continued, the price would eventually rise to P2, moving towards equilibrium. Supply
would then have to increase in order to meet the excess demand until the price is at Pe1.
However, it is unlikely that the supply of houses would increase by over 200% in that short
period of time.
What has happened, due to government intervention, however, is a significant decrease in
demand (80%), from 482 units demanded to 92 units demanded. Supply has also decreased
(50%), from 144 units to 172 units, due to closed sales. Although there is a decrease in
demand, there is still excess demand, leading to an increase in price despite the decreased
demand. The price is now P3, but it is clear that the excess demand has now decreased.
While this is a rough chart that does not take into account the elasticity of supply and
demand for property, it demonstrates the concept of disequilibrium within a marketplace.
Determinants of Demand (600)
As the world changes, the reasons that people will decide to purchase a good or service
will change. These reasons are called the Determined of Demand. It is important to
understand these specific determinants in order to truly understand the problem regarding
the property market within China today.
One of the greatest changes in China today is the increased income levels of the average
urban citizen. The middle class is expanding at a rapid rate on the back of China’s
unprecedented economic growth. (show two graphs; one of China’s GDP growth, one of
income levels) [research]. As the low and middle class of everybody from migrant workers
to recent college graduates expands, the percentage of the income that they spend on
