Can China fix its runaway housing market?
‘Houses should be for living in, not for speculation,’ President Xi said one year ago. But he finds status quo is hard to change.
A year ago, President Xi Jinping declared “houses should be for living in, not for speculation.”
Already, some big cities like Beijing and Shanghai had begun turning themselves into virtual laboratories, searching for cures to runaway housing prices. Xi’s renewed call – given added weight by being delivered at the milestone Party Congress last October 18 – set off yet more experiments.
Now, as home prices are dramatically slowing in Beijing and some other megacities, it appears that at least two of the experiments – price caps on new flats and curbs on house flipping by speculators – may be achieving their goal. Or at least for now.
“The housing burden is real for China’s young people,” said Wan Enjing, 27, who works in human resources in Beijing. “Both buying or renting a home is difficult.”
Her frustration is widely felt among young urban professionals, who fear they may never be able to get onto the first rung of the property ladder. Prices are just too far out of reach.
Part of Xi’s solution is to try to make renting as desirable as buying.
But he faces two main challenges: The housing sector is now one of China’s main pillars of growth – and he does not want to send prices tumbling. And people strongly believe property is the safest and most profitable place to store their money.
“You can talk about fostering a healthy leasing market and broadening Chinese people’s investment options, but if home prices grow at a 15 per cent annual rate, all attempts are in vain,” said Larry Hu, head of greater China economics at Macquarie Group.
Xi finds himself at this juncture after China’s private property sector exploded, made possible by the market reforms and opening up policies that began in the late 1970s, and the countless millions of people who started moving from the countryside to cities.
Private home ownership began replacing the country’s housing welfare system, in which employees received public-financed housing.
And it dramatically and quickly reshaped people’s mindsets, creating economic classes and a hunger for wealth and security. Tight capital controls and painful memories of the 2015 stock market crash reinforced people’s belief that property is the best nest egg.
About two generations after the country began its reform push, property now accounts for 66 per cent of household wealth on average, according to a study by Southwestern University of Finance and Economics in Chengdu.
People’s net worth became tied to eye-watering jumps in property values.
Prices of existing homes in Beijing, for example, shot up 48.1 per cent in the 2015-17 period. In Shanghai, prices went up 41.4 per cent. That compared to a 23 per cent rise in New York and 26.3 per cent increase in Los Angeles, according to the Zillow home value index.
No wonder China’s home ownership has soared to 87 per cent by 2013, compared to 64 per cent in the US, according to Southwest University.
Meanwhile, marriage prospects and home ownership often go hand in hand. And in country where a bias toward male children during the one-child era has left a skewed sex ratio, parents and grandparents often pile their savings into a home to boost a male child’s marriageability chances. The result is that 70 per cent of Chinese millennials (aged 19-36) own property, compared with 35 per cent in the US and 31 per cent in the UK, according to HSBC.
In addition, school options are closely tied to home ownership, leading parents to buy “school district homes” – xue qu fang – whose purpose is not to live in, but to get a child into a top school. A 72-square-foot shack in Beijing that sold in June for US$384,500 was rumoured to have been such a purchase.
A survey by FT Confidential Research found that 32 per cent of families own at least one extra home that is vacant. But they often don’t rent the extra flats. Rental yields – 1.5 per cent or less in Beijing and Shanghai – are not enticing. And because a long-proposed national property tax continues to languish, flat owners do not face big tax bills.
The result is empty homes – as many as 50 million to 80 million, according to various estimates.
Those forces thwart Xi’s hope for more rental housing.
So do others.
City governments remain heavily dependent on land sales for revenue. In 2017, land sale revenue and property-related tax revenue grew to 6.84 trillion yuan, or 45.9 per cent of local government revenue.
Developers are willing to pay far more for land for private rather than rental flats. And with many developers heavily indebted, they would need huge incentives to invest in low-return rental projects.
Here is a look at several experiments under way:
Curbs on resale, prices and flipping
In March of last year, coastal city Xiamen became the first city to ban buyers from reselling flats within two years of purchase. The idea was to discourage speculators looking for quick profits, thereby making property less expensive.
These resale restrictions sometimes coincided with price caps.
In 2016, Beijing became the first Chinese city to cap prices on new flats, as mayor Cai Qi vowed “no home price rises in 2017 from the 2016 level.”
Developers trying to sell flats at “conspicuously high” prices were not given pre-sale permits. They could not buy more land without agreeing on future selling prices. Meanwhile, buyers were required to put down up to 80 per cent in down payments.
Analysts credit these steps with dramatically taming prices in Beijing, where new home prices rose just 0.2 per cent in August from the year before.
Other cities, including Shanghai and Shenzhen, adopted similar programmes.
In all, about 50 cities across China had imposed home buying and selling restrictions according to property agent Midland Holdings. Prices generally have cooled.
But scepticism abounds about the long-term impact.
Nicole Wong, the regional head of property research at CLSA, said prices in first-tier cities are all “pretty badly distorted” because new homes are cheaper than old ones.
Li Zhanjun, chief analyst with the China Real Estate Research Association (CRERA), worries about the tinkering with market forces.
Programmes to help people get on the property ladder through an ownership partnership with the government have been tried in some small cities in China. Beijing announced it would try the “help-to-buy” programme in August of 2017, creating 250,000 flats over a five-year period to be sold at about a 60 per cent discount to the market. Only people who do not own a can buy them and the homes cannot be sold before five years, and then the government and individual will split any profits.
But one year later, the programme is far behind and getting mixed reviews, largely because many of the flats are far away from where most people work.
Also, by mid-September, Beijing had made only 14,791 new units available – far below the target pace of 50,000 units per year.
In April, when a batch of joint-owned homes opened for sale in Changping District, in the outskirts of northwest Beijing, over 70 per cent of eligible applicants who had signed up earlier dropped out. People were not interested in the flats, which were small, and 45 kilometres (28 miles) from jobs in the city centre.
To entice people to buy, the city government eased the rules that only 30 per cent of the units would go to people without household registration – hukou – working in the district.
In contrast, when 427 joint-ownership homes went up for sale in the lively central Beijing district of Chaoyang, more than 120,000 eligible competed for a shot.
“Beijing indeed gave people an affordable option as long as they can endure the far distance and long waiting queue,” said Chen Lei, an analyst with zhuge.com.
But unless more flats are offered in central city areas, without hukou restrictions, the impact of such programmes will be very limited.
Land sales solely for rentals
Some cities are trying to create more rental property, expecting that an increase in supply will both house people unable to buy and slow the growth of prices. Beijing, Shanghai and Shenzhen are at the forefront.
The rental housing will come two ways: conversion of flats that previously were government-subsidised homes; and new parcels sold to developers on condition a certain portion will be for rental units.
Shanghai, for example, sold rental-only plots for an average 80 per cent less than for-sale plots, which analysts said is critical to improve rental yields to entice developers. Since last July, Shanghai has sold 35 plots of lease-only land expected to eventually be 15,000 flats.
Beijing wants to supply 500,000 rental flats, or 30 per cent of the total housing supply in five years. Shenzhen has launched the most ambitious project. Of the 1.7 million new flats to be provided through 2035, only 40 per cent of the homes can be private. Rentals will be 20 per cent, and they will rent for 70 per cent below market value. The rest will be part of other subsidised programmes.
But developers complain that Shanghai sold most of its plots to local state-owned enterprises. They also complain about being strong-armed into money-losing agreements to build rental housing to get prime land for private flat projects.
Li of CRERA said developers have no interest in lease-only plots, which require many years for investment recovery, and when they are forced to do it, they only “engage in tokenism”.
School rights for renters
Renters, unlike homeowners, normally cannot send their children to nearby schools in big cities because they don’t own a home, a prerequisite for local hukou. This has prompted many people to buy homes, especially in districts homes to prestigious schools, pushing prices sky high.
To try to discourage this type of buying, Guangzhou in July launched an“equal rights of tenants and homeowners” pilot to allow tenants to have the same educational rights as homeowners.
But so far renters remain disadvantaged.
In theory, non-hukou holder can also apply, but their children are put at the bottom of school waiting lists. In districts where homeowners outnumber available school slots, renters don’t stand a chance.
“In Guangzhou, most hukou holders own homes, so this programme doesn’t matter to them,” said Zhou Zhenshu, a principal of a primary school in Guangzhou.
Yujing Liu contributed to this article.