Can the rental market deflate China’s housing bubble?

Apartment blocks in Beijing © Reuters

New policies should reduce imperative of homeownership

Chinese home prices have climbed so much and so fast that cities like Beijing and Shanghai now rank among the world’s least affordable property markets. The high cost of living has reduced the competitiveness of local economies by making it difficult for young skilled professionals to take up new positions. Many observers are concerned about the possibility of price bubbles.

After several years of trying to restrain property price growth through local controls on who can purchase homes and how many they can buy, the Chinese government is increasingly seeing the development of the rental market as an alternative route to more affordable urban housing and a way to support the deleveraging of the economy. While recently announced measures should help stimulate the rental market, more will need to be done to affect the underlying dynamics of property buying in the country. A real price correction however could be more than the authorities want to bargain for.

China’s home rental market is largely underdeveloped compared with other countries. Although housing reform started in earnest less than two decades ago, a much higher share of the population now lives in self-owned housing than in most advanced economies.

Part of this is a cultural preference for ownership. With competition for brides especially fierce for sons born under the now-abandoned “one child” policy, home ownership has become a prerequisite for many women evaluating prospective husbands.

Renters in China also enjoy comparatively fewer legal rights. Until now, landlords could terminate a rental contract arbitrarily, citing almost any plausible excuse, such as a desire to live in the property, to replace an existing tenant with a higher-paying one.

Homeowners also have enjoyed better access to social welfare and local public services. In all but the nation’s largest cities, homebuyers can directly obtain local household registration status, or hukou; this is required for full access to many public services, but renters who have moved from other areas are usually not automatically eligible for local hukou.

The most important public benefit linked with home ownership is education. In principle, any child with city hukou can attend his or her neighborhood school. However, places at quality schools are usually in short supply and priority is given to children whose family own a home in the district and who are registered residents. This benefit is one reason property prices can be significantly higher than the value that would be obtained through cash flow analysis.

Stimulating the market

The State Council, China’s cabinet, began working to address the bias toward homeowners with a policy statement on the development of the rental market in June 2016. This past July, the Ministry of Housing and Urban-Rural Development published guidelines to promote the rental market in big cities, with Guangzhou, Shenzhen and 10 other cities selected for a first-round pilot program. Beijing, Shanghai and a number of other local governments have announced detailed measures of their own in recent weeks too.

Measures to reserve more land for rental housing are a common element of these efforts. Under the housing ministry’s guidelines, state-owned companies will be allowed to build rental apartments on their underused industrial sites. Rural collectives on the outskirts of urban areas can now use some of their land to build rental housing too. Shanghai has set an explicit aim of building 700,000 new rental apartments by 2020 while signaling that commercial property can be converted for rental homes. Two land plots designated for rental apartments were auctioned on July 24.