A nationwide government-subsidized housing rental scheme is part of Beijing’s latest package of measures intended to cool the real estate market.
Seven government departments jointly released draft guidelines calling for public housing aimed at renters in the mid-to-low income bracket. About 370,000 units will come up for grabs this year under the pilot program.
Vice Premier Li Keqiang – favorite to succeed Wen Jiabao is China’s premier – has leant the scheme is high-profile backing, saying that it not only helps curb skyrocketing property prices, but also addresses income disparities and facilitates urbanization.
Li’s remarks reflect the two-prong strategy that underpins this approach.
First of all, the public rental scheme represents a broad shift in China’s housing policy from principally monetary tightening towards a more balanced model whereby action is taken to increase supply and dampen investment demand.
Second, the scheme is an indication of mounting government concern about social instability due to the widening gap between rich and poor. Beijing ranks soothing public anger even higher than introducing more monetary and taxation policies to rein in the property sector.
Unlike previous rental programs for low-income households, the new campaign is set to cover a much larger share of the population, with cities such as Shanghai, Chongqing and Guangzhou already indicating that they will participate. And, for the first time, out-of-towners working in big cities will be included.
From the perspective of a Chinese person aged 50-60, the emergence of a private property market is one of the most remarkable – and perhaps alarming – developments of the last 15 or so years.
Many of these people still cherish that worry-free era when they were allocated apartments by the state-owned factories at which they worked, based on rankings and work experience. Rent had to be paid, but it was tiny – just enough to cover housing maintenance costs. In those days, no one talked about buying a flat under a public rental scheme.
The housing ownership reform of the late 1990s – particularly a government edict in 1998 – changed the landscape considerably. Most people were required to buy their homes, with employers permitted only to extend some cash to support purchases rather than continuing to offer apartments for rent.
Reform has delivered huge benefits: Many of those who bought their homes were able to trade them for a profit and have since climbed up several rungs on the property ladder, perhaps accumulating other apartments for investment purposes at the same time. The explosion in demand swung momentum in real estate from public sector subsistence to private sector enterprise, creating a dynamic industry that is now a key contributor to the country’s overall economic growth.
At the same time, though, it has significantly boosted housing prices, especially in the past few years, with demand sustained by rapid urbanization.
The situation has come full circle. The younger, marrying age generation that 30 years ago couldn’t buy property due to political circumstance is now being pushed to the sidelines by commercial forces in the form of soaring prices. Officials are also concerned that some big cities are suffering a “brain drain” as talented people move to smaller places to avoid high living costs.
Given these circumstances, rolling out public rental schemes nationwide is a sensible move as it will help fill a gap in the market. However, we know little about the specifics of these schemes.
Two big questions remain unanswered: How quickly will the pilot programs be expanded? And how will local governments determine who is eligible for subsidized housing?
Take Shanghai as an example. According to one proposal, people with less than 15 square meters of living space or with no property in the city will qualify for the scheme. But no overall income threshold has been set. This means that droves of recent college graduates currently living with their parents in small apartments will be able to apply for subsidized housing even if they earn RMB5,000 (US$730) or more each month.
Even when programs are expanded and incomes are taken into account – it is said that each district in Shanghai will draw up its own guidelines on income thresholds – things will fall apart if the rules are not properly implemented. Close supervision is required to weed out any irregularities in the qualification process and then checks will need to be carried out to ensure tenants don’t lease out their properties.
Behind all of these considerations lurks another question: Who will build the low-income housing?
The central government has said it wants the public rental scheme to develop via a market-based mechanism, with real estate firms taking the lead instead of local authorities. But it is difficult to see how a profit-driven developer could be convinced to participate without abundant government incentives.
Li Keqiang said that private capital is welcome as it diversifies fundraising channels and he urged local authorities to create favorable taxation and financing policies to support public rental schemes. It is imperative that the details are worked out sooner rather than later so that nascent schemes don’t lose momentum.
If China’s private property story is to be sustainable in the long term, more affordable housing is required and it makes sense for Beijing to begin to address this issue as part of nearer-term efforts to rein in prices.
The two-prong strategy of increasing supply and clamping down on speculation will grow more apparent in the second half of the year and it will likely contribute to a decline in prices in the mid-to-low end sector. Property developers may find it pays to revisit their business models in the light of this change in policy.