Investigating China's Property Bubble: A Case Study from the "Center of the Universe"


Why is property within Tsinghua school district more valuable than a diploma from Tsinghua University? Apart from having investment functions, a personal sense of achievement, and other reasons, the fundamental cause is that although Wudaokou, where Tsinghua University is located, gathers a large number of elites, what was driving local GDP for the past 20 years was the construction of office buildings rather than residential property, making the latter a scarce resource. This is the reason why U-Center housing prices remain higher. At the same time, under the current land system, it is difficult to convert the rural land and institutional land in the vicinity of Wudaokou into residential land for development and utilization. In other words, the property problem lies in the supply. Drawing on case studies from Harvard University and Stanford University, we can see that the lack of residential land in cities, a result of GDP-oriented policy, is an important factor in China's property bubble.

Recently, there was a lively discussion online about whether a Tsinghua diploma is less valuable than Tsinghua school district housing. Some families have struggled to send their children to Tsinghua University, only to find that their children cannot afford school district housing near the university after graduation. This problem is not difficult to explain, as I will do at the end of this article. First, I will analyze why housing prices near Tsinghua University are so high - this is an interesting and typical case of the Chinese property bubble that has not yet been carefully excavated.

Wudaokou - U-Center

When I was a student at Tsinghua University in the early 1980s, there was a piece of agricultural land outside the East Gate of the university, with only a path leading inside. Bordering the path was Shuangqing Road, which could only accommodate two cars side by side. This road led to the Qinghe Woolen Mill, which was a typical state-owned enterprise undergoing reform at the time.

Back then, the area outside of the East Gate was very desolate. Along with many other classmates, after 4 o'clock every afternoon (especially in the winter), I would begin my running route near the East Gate, run to the Wudaokou railway line, make my way through the abandoned thermal power plant near the North Gate, and return to Tsinghua, with a whole routine of 5 km or so. At that time, Tsinghua students studied hard and also paid special attention to sports. We were scrambling to exercise, hoping to achieve good results in the 1500-meter running and other standard tests.

With the passage of time, this piece of land now is completely changed. Now it is broadly known as Wudaokou, and also dubbed the U-Center.

50,000 vs. 100,000: The high-quality school district doubles residential worth

The high prices in this area are related to the school district. It is close to Tsinghua University, and access to the East Gate of Peking University is only one subway stop to the west. There are a number of superior schools in the district, such as the Primary School Attached to Tsinghua University, Primary School Attached to Peking University, Zhongguancun No.1 Primary School, Zhongguancun No.2 Primary School, Zhongguancun Secondary School, No.101 Middle School, and the Middle School Attached to Tsinghua University.

How much can the school district explain the high prices? There is a good contrast here.

The residential area of this district belongs to the school district, and property prices generally exceed RMB 100,000 per square meter. For example, at the 15-year-old Shuiqing Muhua Garden south of Chengfu Road, Wudaokou, property prices are about RMB 100,000 per square meter.

However, the price for another apartment (also with a 70-year property right) across the road, which is even closer to Tsinghua University, only has property prices of about RMB 50,000 per square meter. The reason is that property owners of such apartments have not been allowed to register so far, so the owners cannot enjoy the same school district privileges. The reason why apartment ownership cannot be registered in this building is that the Zhongguancun Police Station has not agreed, making the building unable to join the community. This is because a committee of owners cannot be established since the owners from around the world are too scattered. There is also a five-star hotel nearby, and a lot of hotel facilities are connected with the apartment, so the situation is more complex. I have often told younger colleagues to consider purchasing an apartment at this low price while it cannot be registered, as this issue will be solved sooner or later, and the prices will jump when it is.

GDP orientation resulting in competition between residential housing and commercial property

Wudaokou has been dubbed the U-Center by Tsinghua students since it is extremely busy and bustling, particularly on weekends and holidays. Plenty of young entrepreneurs, students, and professionals gather here. However, the new buildings in this 5-square-kilometer section of the city area are almost all office buildings, newly constructed over the past 20 years. Residential homes are extremely scarce.

These office buildings include Tsinghua Science Park, which takes up about 500,000 square meters and consists of seven or eight 25-story high-rise buildings. These include the high-rise building specially approved by the government for Google, as well as the VIA Building, which was self-built built by VIA Technologies with special approval. In addition, there are a large number of new office buildings of the Academy.

In contrast to the office property, there are only about three or four residential buildings newly constructed over the past 20 years, including the aforementioned Shuiqing Muhua Garden, whose building area is probably less than 100,000 square meters. Another large section of real estate is occupied by Huaqing Jiayuan, built 15 years ago, with a construction area of about 150,000 square meters. Frankly speaking, the architectural standards, construction quality, and design level of Huaqing Jiayuan are very rough from the view of modern standards. In addition, Tangning ONE, built by Longhu Real Estate in 2011, is a high-end apartment-style property with an average price of RMB 150,000 per square meter. The aforementioned apartment which cannot be allowed for registration has a total area of about 50,000 square meters, and was completed 10 years ago as a supporting facility for Tsinghua Science Park. Compared with the commercial property area of millions of square meters, the supply of residential property is really scarce in this neighborhood.

As a direct consequence of this, residential property is in short supply, and prices are rising rapidly. For example, the opening price of Huaqing Jiayuan was about RMB 3,000 per square meter, but has now risen to over RMB 120,000. The teachers who had the courage and funds to buy this property in the beginning have become millionaires by now. Most of these teachers have now moved out of Huaqing Jiayuan, as it has become a popular place for rental housing by foreign students, especially Korean students and young students, making it too noisy to be suitable for home life. The developer of this complex has often said that he created great wealth for housing purchasers, but he did not reap many benefits. His words are reliable, at least in Wudaokou as the U-Center.

However, it is more important to ask why the Beijing and Haidian District Governments, though aware of the high housing prices in Wudaokou, are unwilling to approve more residential land here. A GDP orientation is the fundamental reason. The land in Wudaokou has been approved for office buildings, science and technology parks, and the high-rise buildings homes to Google and VIA. These land uses can directly increase GDP. Therefore, a large number of corporate headquarters have gathered in Wudaokou, such as Sohu, Netease, and Google, as well as the National Examination Center and Cemet, the earliest platform to provide Internet information services to institutions of higher education in China. Such a strategy has indeed achieved GDP growth in Wudaokou and built the area's reputation as a high-tech center, but has resulted in high local housing prices, pushing the professors and tech workers in the area to seek housing outside the district.

Cases of Harvard University and Stanford University

For now, let us temporarily leave Wudaokou to observe the property near Harvard and Stanford.

In the recent 100 years, Harvard has become a model of higher education that continues to develop the surrounding economy. However, the surrounding area of Harvard University is dominated by residents. Beyond the small area of Harvard Yard, Harvard has no other gate. The university is fully integrated with the city. So how does Harvard University meet its rising housing needs?

Harvard University established its own real estate company long ago to constantly purchase the land and housing of surrounding residents as it came on the market. However, this is not enough, as the purchase of residential housing is not approved by the Planning Commission of Cambridge, where Harvard is located. The commission has refused the transformation of residential buildings into office buildings, resulting in a tense relationship between Cambridge and Harvard University.

In addition, Harvard's efforts to modify its own buildings have also seen interference by the Planning Commission of Cambridge. The Planning Commission is elected by residents, and it often focuses on the interests of existing residents rather than the overall development of the city, which has led to many absurd stories. For example, in 2010, Harvard University modified an office building, and the designer planned two completely symmetrical buildings on opposite sides of the road in Cambridge, which now have become the Asia Center and Fairbank Center for Chinese Studies as well as the Government Department of Harvard University. In order to connect the two buildings without destroying the streetscape, an underground passage was designed. Nevertheless, the Planning Commission objected to this underground passage despite its minimal effect on the streetscape. It is said that the children of one member of the Planning Commission had been rejected by Harvard admissions, so this member was very angry and strongly opposed. Therefore, although Harvard University has an increasingly prominent reputation in the era of globalization, it is difficult to expand within its own neighborhood. The GDP of Cambridge has also experienced minimal growth, as it has failed to harness the benefits of its academic powerhouse.

Due to the failure to smooth relations with Cambridge in the long run, before the outbreak of the financial crisis, Larry Summers, as Harvard President decided to develop at the town of Allston across the Charles River. Allston's vacant lands made it a prime candidate for the university's expansion, and it is now where  Harvard Stadium and Harvard Business School are located. However, because of the outbreak of the financial crisis, development plans were delayed for nearly a decade.

Stanford University has been luckier than Harvard in this respect. Stanford University has promoted the development of high-tech industries in Silicon Valley, resulting in skyrocketing values to its surrounding lands. Fortunately, Stanford's original campus was a huge farm, giving the university plenty of room to grow. In order to cope with the high housing prices, Stanford University has used part of its own land to develop its own property houses and limited property houses, which it then sells to professors. According to the regulations, these houses can only be sold to Stanford faculty. This partially solves the problem of development for Stanford University brought by Silicon Valley's high housing prices.

Tsinghua University and Peking University are also partially imitating this model. Tsinghua has purchased some land in the vicinity of Qinghe to build limited property houses which it will sell to Tsinghua faculty. These houses are only allowed to be transferred within the campus community, similar to Stanford's regulations. This solution partially hedges the high housing prices in Wudaokou.

Institutional and rural dilemmas for the supply of residential land 

There is land near Wudaokou, but this land presents many challenges for development.

The Class-I land near Wudaokou is owned by Dongsheng Township. It is somewhat unexpected that there is a township occupying the high-price lands in Wudaokou, which was not included in urban planning. Dongsheng Township still retains its own health and township office, and all the buildings here are 5-story houses. The area can be developed and used by improving the floor area through the replacement of buildings. However, if rural land is converted into urban land, the township government itself cannot directly receive many benefits, so this transaction is difficult to carry out.

In addition, Tsinghua University, the Academy of Sciences, and other institutions near Wudaokou have a great deal of their own land, it is institutional land, which cannot be converted into residential land for development. For example, the buildings of the Academy have been constantly expanded from 5 to 15 floors in recent years, but this is all office space and cannot be used for residential purposes. Tsinghua campus has nearly 6,000 acres of land, which is one of the largest university land areas nationwide, but it cannot be used to construct a new campus. There are a large number of 4-story or 5-story residential houses and dormitories in Tsinghua University, but it is difficult to add floors and increase their volume since the existing residents are opposed to demolition. What's more, Tsinghua University does not have a 100% right of disposal on its own lands.

This poses a dilemma. That is, although the property prices are high, it is difficult to develop land for residential use in order to provide supply solutions. This is a common problem in many major Chinese cities, but it is particularly prominent in Beijing.

Why can't Tsinghua graduates afford the school district housing of Tsinghua University?

Finally, I will analyze why the Wudaokou school district housing prices are so high, going far beyond the economic capacity of graduates of Tsinghua University.

First of all, parents send their children to Tsinghua University to obtain a sense of accomplishment in life. This sense of accomplishment often comes from non-economic factors, including personal well-being and social recognition. Therefore, even if graduates do not have access to high wages after graduation, the university will continue to attract many students.

Secondly, in terms of economics, a university graduate (including those from Tsinghua) has a rising income, which is difficult to measure from a short-term perspective. In the long run, a degree from Tsinghua will result in premium human capital.

More importantly, the high prices near Wudaokou are an investment phenomenon. As long as investors expect future prices to continue rising, there will be a great deal of interest. This explains the problem of why high residential prices in the neighborhood are beyond the income of outstanding graduates.