China’s ex­per­i­ment to tame wild prices

Pres­i­dent is push­ing for em­pha­sis to move away from pur­chas­ing and into rent­ing in­stead

Weekend Argus (Saturday Edition) - - PROPERTY -

CHI­NESE Pres­i­dent Xi Jin­ping has un­leashed the world’s big­gest ex­per­i­ment aimed at tam­ing run­away prop­erty prices.

Since Xi used a mile­stone Com­mu­nist Party Congress in Oc­to­ber to push a hous­ing model that em­pha­sises rent­ing, a flurry of ac­tiv­ity has been un­der­way by de­vel­op­ers, banks, lo­cal gov­ern­ments and even the stock ex­change. The push is the first of a pack­age of pro­grammes, in­clud­ing a lon­gawaited prop­erty tax, poised to un­fold over sev­eral years to rein in one of the world’s wildest prop­erty mar­kets.

“China’s prop­erty mar­ket is on the brink of tremen­dous change,” says Shen Jian­guang, chief Asia econ­o­mist at Mizuho Se­cu­ri­ties Asia in Hong Kong. “The push for rental prop­er­ties shows a new model is start­ing to emerge.”

Xi is lever­ag­ing his im­mense power to try to solve a prob­lem that’s dogged pol­icy mak­ers around the globe: spi­ralling prop­erty prices in ma­jor cities that have fu­elled ris­ing in­equal­ity. The aim seems to be a new mar­ket model, some­where be­tween the cap­i­tal­ist frenzy that sent home prices in Shang­hai and Bei­jing rock­et­ing, and the Com­mu­nist sys­tem, where dwellings were al­lo­cated by work units.

Es­tab­lish­ing a vi­brant rental mar­ket will help to defuse the risks from “ir­ra­tional” home prices, says Deng Yongheng of the Univer­sity of Wis­con­sin, who helped carry out a study that showed a 1 538% rise in land prices in Bei­jing be­tween 2004 and 2016. The long- term ef­fects could range from driv­ing con­sol­i­da­tion among de­vel­op­ers to fuelling con­sumer spend­ing as peo­ple pay less for hous­ing, says Wang Tao, an econ­o­mist for UBS Group.

Around China, large rental com­plexes are be­ing com­pleted, un­der con­struc­tion or in plan­ning, and fund­ing for th­ese projects is be­ing made avail­able. The changes may al­ter de­vel­op­ers’ busi­nesses, shake up gov­ern­ment rev­enue, and help make more Chi­nese cit­i­zens, like Ger­mans, renters for life.

In the­ory, a thriv­ing rental mar­ket would add hous­ing sup­ply and help sta­bilise prices af­ter a 13-year prop­erty rally. The old model that pri­ori­tised home own­er­ship en­cour­aged “spec­u­la­tion and crazy price gains – and that model is com­ing to an end,” said Rosealea Yao, an an­a­lyst at Gavekal Drago­nomics in Bei­jing.

City gov­ern­ments from Bei­jing to Shang­hai have ear­marked pub­lic land to auc­tion to prop­erty com­pa­nies for the de­vel­op­ment of rental projects only. Coun­try Gar­den Hold­ings, China’s largest de­vel­oper by sales, plans to make one mil­lion units avail­able over three years. Banks are of­fer­ing credit to de­vel­op­ers for fi­nan- cing rental projects, and the Shang­hai Stock Ex­change is en­cour­ag­ing the cre­ation of in­vest­ment prod­ucts backed by rental in­come.

Xi is try­ing to al­ter the pop­u­lar be­lief that prop­erty is a one-way bet, since any short-lived de­clines in prices have in­evitably been fol­lowed by booms.

Home­own­er­ship rates in China are among the high­est in the world, at al­most 90%, ac­cord­ing to Cush­man and Wake­field. Peo­ple also buy young. Par­ents of­ten help sons buy a place as a pre­req­ui­site for mar­riage.

Rental prop­er­ties have been a hard sell, in part be­cause of lim­ited ten­ant rights and the low qual­ity of much of the stock, with some units even lack­ing their own bath­rooms and kitchens.

Even if the new poli­cies can help change that mind­set, chal­lenges abound. First, China’s lead­ers have to en­sure they’re able to tame the mar­ket with­out tank­ing home prices. They’ll also have to bal­ance other un­der­ly­ing driv­ers point­ing to slow­ing de­mand. Of­fi­cials will have to drop the habit of let­ting prices boom when the econ­omy needs a boost.

Still, gov­ern­ment back­ing means the size of China’s rental mar­ket could drive an­nual rental pay­ments to 4.2 tril­lion yuan (about R7.9 tril­lion) by 2030, al­most half of to­tal home sales in 2017, ac­cord­ing to es­ti­mates from Ori­ent Se­cu­ri­ties.

To sup­port the push, Shang­hai has al­lo­cated 42.5 mil­lion m² of land for rental homes through to 2020 – more than for hous­ing ear­marked for sale. That will add about 700 000 units by 2020, about 41% of to­tal sup­ply.

Un­der a trial pro­gramme in 13 cities, ru­ral col­lec­tively owned land can be con­verted into rental hous­ing. Some cities are also en­cour­ag­ing the con­ver­sion of of­fices, malls and fac­to­ries into rental units.

While an­a­lysts say it could take years for the changes to take hold, some cau­tion against un­der­es­ti­mat­ing the re­solve of Xi. – Bloomberg


Res­i­den­tial build­ings in Bei­jing. Chi­nese Pres­i­dent Xi Jin­ping is push­ing a hous­ing model to fo­cus on rent­ing to put a check on rock­et­ing prop­erty prices.

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