1 Housing Finance, Economic Development and Housing Affordability in China: A Case Study of Shanghai

This paper shows that the transformation to market mechanism corrects distortions under the old welfare housing system and provides right financial incentives to housing investment; however, the affordability of housing is still a big problem for many Chinese urban residents. Based on the Shanghai experience, this paper argues that the recent restructuring of housing finance system has played a crucial role in promoting both housing investment and housing demand. But data also shows that there is a large gap between housing prices and populace’s incomes. The investigations are conducted in both price-to-income ratio and residual-income approach. However, upon closer examination, the severity of housing affordability issue is found not exactly as the high price-to-income ratios reflect. Only looking at the price-to-income ratios are misleading. Further, this paper argues that the essence of housing affordability problem faced by Shanghai households is deeply rooted in the continued widening trend of income and wealth inequality during the economic transition. Nonetheless, a sustained economic growth is the ultimate solution for solving housing affordability problem. This paper also explores both positives and limitations of current China housing finance system in supporting low-income population’s housing affordability. Finally, evidences show that the expanding housing inequality would be an increasingly significant factor in determining the incom