Japan and South Korea began to seriously urbanize after the World War II. The urban population of Japan grew to 78.6 percent in 1975, from 37.4 percent in 1950. South Korea's urban population increased to 74.4 percent in 1990 from 27.7 percent in 1960. In the 1960s alone, 27 percent of national population moved into cities from rural areas. It took around 30 years for Japan and South Korea to finish their urbanization. But they did so without creating huge slums and their Gini Coefficients never went above 0.3. They avoided the plunder of public wealth by implementing equitable housing and taxation policies.

The aim of policy should be to ensure ordinary families can afford their own home, and to prevent a few people from plundering the public purse. Taxes should be tailored to curb property speculation. Japan and South Korea kept transaction taxes on house purchases low but imposed marginal income tax rates of up to 75 percent on profits made from house sales. Local property taxes were typically of the order of 10 percent and inheritance taxes were rigorously enforced. There were preferential policies to encourage home buying, but not to accumulate large property portfolios. In a nutshell, the housing markets in Japan and South Korea were geared entirely to consumption.

China has been urbanizing rapidly since reform and opening up started in 1978. The urban population grew from 18 percent in 1978 to 47.5 percent in 2010. But urbanization has also created a huge floating population of around 200 million migrants and has allowed a few people to snatch the lion's share of the national wealth.

The system encourages local governments to implement policies that favor speculation for the sake of boosting GDP. The end result is land speculation crazier than in any other country at any time. Houses have become the number one way to get rich and stay rich. And the stimulus package encouraged a real estate bubble, imported risk into the domestic banking system, and created a whole new class of upstarts. There has been a profound change in social values and behavior. Everyone in China now thinks they can get rich by speculating in real estate. And each link in the property chain is chasing windfall profits, from local governments, developers, banks through to speculators.

Urbanization in China has meant a few people getting rich at the expense of the majority and to a dramatic widening of the wealth gap. If the government does not undertake a fundamental reform of the housing system to stop the plunder, it risks severe social problems.

The author is a researcher with the Institute of Finance and Banking of the Chinese Academy of Social Sciences.

(This post was published in Chinese and translated by Li Shen.)

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