China’s experiment to tame wild prices

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

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

PICTURE: 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.