China property

China says renting is as good as owning a home, but how many will buy that argument?

The “go rental” underscores a multi-faceted strategy that involved allocating more land to rental homes, fostering professional leasing institutions and tax concessions

PUBLISHED : Saturday, 05 August, 2017, 9:16am
UPDATED : Saturday, 05 August, 2017, 9:16am

For city dwellers about to make the biggest purchase in their lives, the Chinese government has good news: renting is as good as owning.

Anxious to cool an overheating home market during a year when the ruling Communist Party selects its next lineup of leaders, the authorities introduced a pilot programme in 12 major cities, where tenants of rental properties will enjoy the same access to public services as property owners.

Most importantly, they qualify to enrol their children in their neighbourhood school districts, thereby removing the need to buy property in areas with the best schools.

Nine ministries under the Chinese government cabinet issued a document on July 20, urging big cities with net population inflows to accelerate the development of the rental market. The right of rental tenants to enjoy public services will be written into law to ensure stability in the duration of tenancy contracts and rental income, while the pilot scheme is tested in cities including Guangzhou, Shenzhen, Nanjing and Xiamen.

Four days later, the party’s highest decision-making body, in a meeting to discuss economic policies for the second-half, called for “stabilising” the housing market and building a “long-term” housing price stabilisation mechanism. The “go rental” drive is part of the mechanism.

“The law is part of a broader effort to address a missing piece in China’s housing market,” which is the rental market, said Yang Hongxu, deputy director of E-house China R&D Institute. “Several factors have made China a country with the high home ownership in the world, but not many people would settle on a tenant.”

The question is how far the latest experiment can go to take real effect, when it cuts into China’s household registration system, known as hukou. The hukou has its origins as the centuries-old family register, where a person is identified with the place of birth. The hukou influenced similar household registers in Japan, South Korea, Vietnam, Russia, but is required by law in China and in Taiwan.

From a broader perspective, the pilot scheme and the ensuing directives to “go rental” underscored a multi-faceted strategy that allocates more land for building rental homes, foster professional market institutions to run leasing business, offer tax incentives to landlords and renters, and amend the current regulations that are more favourable to landlords.

Or so the theory goes. Extending homeowners’ rights to tenants, however, is controversial.

Until now, ownership is the biggest barrier, second only to the hukou system, that prevents the education and healthcare resources in big cities from being chewed away by a surging migrant population.

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In reality, the hukou in the third and fourth-tier cities, has become more accommodating. Migrants who buy home in these cities are granted a hukou, which in turn gives them access to public services. Such flexibility has also driven up home prices and sales.

In the first and second-tier cities where population inflows are the largest, authorities have used a combination of hukuo and home ownership to stem such influx of migrants.

Young graduates with hukou in these cities cannot send their children to nearby prime schools unless they own a home, where skyrocketing prices have become out of reach for many.

China’s rental business makes up only 2 per cent of the property market, compared with 20 to 30 per cent in developed economies, according to Xinhua News Agency.

The high property prices in first-tier cities, with attached social entitlements, have polarised the society into two classes: owners and the renters, wedging a sharp divide that has become a bigger issue than the difference in educational and income levels or hometown.

“In China, the home itself is not the issue. It is the scarce resources attached to it that is the problem,” said Qin Shuo, a financial commentator.

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Sceptics said not only would an attempt to break the barrier be economically unrealistic, but also politically unpopular.

Take Guangzhou, the first among the 12 cities to issue policy details for the pilot scheme.

The fine print that emerged after the media hype of the city’s commitment to equal rights to tenants and owners, showed it wasn’t a cause for early jubilation.

To qualify in Guangzhou, a city of 14 million people, will be no easy feat.

According to the document, only renters with Guangzhou hukou, or the handful of local government-recognised top talents, are eligible.

What’s more, renters must register their lease contracts with the government to apply for the benefits, which few landlords would actually facilitate, as that would incur taxes.

In the end, the city’s 5.35 million non-locals were hardly beneficiaries of the policy, said E-house China R&D Institute’s Yang.

Yang said the value of “school-district homes” would be unaffected by the policy, because even if more children were eligible to enrol into prime schools, that would only drive up rents for nearby homes. That in turn, would boost rental yield and attract more investors to buy these homes.

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Already, hukou holders in first-tier cities are feeling the strain of scarce school and hospital resources and reluctant to share with non-hukou holders.

Zhang Hongwei, research director of property consultancy TopSur said even if Guangzhou granted non-hukou holders more resources, Beijing and Shanghai were unlikely to follow suit as they had made controlling the city’s size, geographically and demographically, a priority.

Instead of “equal rights”, Zhang said providing more rental homes was a better option, one that Shanghai and Beijing had taken on.

Shanghai last week put up two parcels for sale, restricting to only build rental homes. Beijing earlier this year promised that of the 1.5 million units it would build in the next five years, 500,000 units would be for rent only.

To boost supply, Yang Xianling, director of Homelink Research Instiute, recommended that mega cities could carry out the pilot to allow vast rural land to enter the primary land market to be developed for rental homes. State-owned enterprises should also put up their vast idle land for rent homes, he said.

Financial commentator Qin Shuo said considering the reality, the best place for “equal rights” to take place may be in the satellite cities around China’s mega cities, eager to grow their populations.

Wuxi, a city of 6.5 million which is 135 kilometres west of Shanghai is one such case.

On July 28, the city allowed tenants to apply for hukou, as long as they can prove that they have paid local social insurance for five years. Prior to this, migrants have to own a home that is 60 square metres or larger in order to qualify to apply.

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Wu Xianghua, a professor with Nanjing Tech University said the trend came about as second-tier cities compete with each other to attract talents.

“People in these cities still would buy homes if they could. But at least the new policy give college graduates and poor migrants some hope,” he said.

It’s a different case in Tokyo, the world’s largest metropolitan area withy 33 million residents. Apartment rents have been holding steady in Tokyo, with average mid-market asking rents rising 0.4 per cent in the second quarter among the city’s 23 wards, according to Savills’ data. At an average of 3,654 yen per square metre (US$33), that’s almost the same price as in 2010.

“Most elite schools are private schools that anyone can apply to attend, regardless of where they live, as long as they can afford the tuition fee,” said Mia Enatsu, a 30-year-old Tokyo resident. “Most people don’t have the need to buy a home or rent a home in areas with elite schools” because the concept of “school district” propery doesn’t exist in Japan, she said.

With reporting by Summer Zhen in Hong Kong