EO Quarterly, Autumn Edition, Cover Story [Edition Summary] 

Translated by Song Chunling

Original article: [Chinese]

China's Housing In Numbers

* Construction will have started on 10 million subsidized homes in 2011

* 36 million units of subsidized homes in China to be built between 2011 and 2015

* There are 218 million urban households in China

* 1.3 trillion yuan will be spent on the construction of China’s subsidized homes in 2011

* Of that total, the central government contributed 152.2 billion yuan

* 2% profit margin on subsidized housing projects

* 30% profit margin on typical residential developments

At first, the government target's of starting construction on 10 million subsidized apartments in 2011 and 36 million during the twelfth five-year plan sounded like another Great Leap Forward.

However, the Ministry of Housing and Urban-Rural Development said in September that work had begun on 9.86 million of those homes. There are doubts about the reliability of its data, but if the State Council’s ambitions are realized, a fifth of Chinese families will be living in subsidized housing by the end of 2015. As well as improving conditions for the nation’s poor, the project will transform the real estate industry.

In fact, that transformation has already started.

When the plans were announced, industry analysts worried that subsidized housing would take potential customers and land away from commercial developers that cater to the low-price market.

In 2010, total sales of newly-built commercial homes represented about 1 billion square meters, according to the Bureau of Statistics. Assuming that every apartment is around 100 square meters, the number of private homes sold in 2010 is similar to the construction target for social homes in 2011.

Developers that are focused on the bottom end of the commercial housing market, such as Vanke (万科) and Country Garden (碧桂园）, worry that they may suffer from the accelerated construction of subsidized housing. Given the completion timetable, the effects may not be felt until the end of 2011. 

Their fears are dismissed by the Ministry of Housing and Development, whose policy official Wang Juelin (王珏林) says that public housing and commercial housing serve completely different markets. He says that rises in home prices mean that the section of the population that is eligible for public housing would never be able to afford even a small-sized commercial apartment.

So far, the statistics don’t show any evidence that sales of commercial housing have suffered. In 2010, work started on 5.8 million subsidized homes, but sales of private homes that year rose by 10% from 2009.

People haven’t been putting off home purchases this year either - commercial home sales between January and June were up 13% - but the debate continues with some analysts arguing that the consequences of the social housing project won’t be clear until a couple of years from now, when construction finishes on millions of homes.

Others say that the distinction between commercial housing and subsidized housing can be misleading because there is overlap. For example, 6 million of the 10 million subsidized homes are either cheaply-built commercial constructions that have been converted into subsidized homes or apartments for people who had been living in shacks that were destroyed to make way for new developments.  

Normally families whose shacks are destroyed receive grants to buy new homes, but many of them have been moving into subsidized housing instead of buying commercial apartments.

Other factors blur this boundary between public and private housing. For example, some families buy their subsidized housing from the local government and some of the subsidized homes aren’t built by the local government, but by state-owned enterprises and universities.

The land problem is similar. Will developers of commercial homes be squeezed out by subsidized housing projects? Anticipating this concern, the Ministry of Land and Resources has a separate list for land that has been set aside for subsidized housing.

But urban land is in limited supply, and, although it removes competition between subsidized and commercial projects on a given plot of land, it doesn’t clear up the wider problem of how local governments ought to allocate land.

The subsidized housing policy is going to trigger a chain reaction, says Hua Zhongwei (华中炜), an analyst from HuaChuang Securities (华创证券). “It will encourage the developers to focus on luxury apartments (高端住宅), in order to make most use of the land.”

Critics argue that the government’s attempt to control the real estate industry won’t stabilize house prices, but just fragment the market, causing a sharp increase in the price of commercially-built housing.

They say China will follow the path of Hong Kong, where more than 2 million people live in subsidized housing, but commercial housing is among the most expensive in the world. In Singapore, the situation is even worse, with 85% of the population living in subsidized housing, which is a tiny fraction of the price of commercial housing.

The real estate market in both city states results from the scarcity of land resources and the competition for space between social and private projects.

It’s hard to balance the good intentions of social housing projects with their divisive effects on the market.

Of course, the scale of the social housing plans means a boost for fixed investment and employment. The 2011 investment could be around 1.05 trillion yuan, says Ba Shusong (巴曙松), department deputy director of the State Council’s development research center

If that entire sum is spent, he expects that investment on commercial housing will decrease by 30%.

“The real estate industry is not likely to see substantial growth this year and next due to the strict controls on house prices.” says Hua, of HuaChuang Securities. The brokerage estimates that around half of the revenue reported in the real estate industry this year comes from land transfer fees and taxes charged during development and sales.

He adds that by pushing social housing, local governments will be imperiling one of the main sources of their income –the land transfer fees paid by private developers.

HuaChuang estimates that most of the 10 million units of social housing started in 2011 won’t be complete until 2013, which, when added to next year’s construction starts plan, means there will be 18 million social home under construction in 2012. For local government, it could be the most stressful period in this “twelfth five-year plan.”

The suspicions about the 98% figure for this year's construction starts stems from an understanding of the pressure that local governments are under to meet the targets.

Newspapers have been full of reports on officials inflating their construction statistics (for example in Shangluo, Shaanxi), quality problems (like those in Hebei, Inner Mongolia and Henan) and allocation scandals (like the one in Zhejiang).

These raise the problem of how Beijing ought to supervise the construction of social housing as well as the more fundamental question about the aims of the social housing policy. Is it for the welfare or for the investment?

“The focus of public housing policies should shift to welfare,” wrote Ba in a recent article. The State Council official calls for a long-term policy of “moderate residential right”（适度居住权） with less focus on short-term regulation of the real estate industry.

Terminology
Subsidized Housing (保障房) - includes Low-rent housing (廉租房), Economic housing  (经济适用房) and public rental housing (公共租赁住房)
Commercial Housing (商品房) - homes sold at market prices

Background Reading

Financial Times Housing subsidies at heart of Beijing’s ‘new deal’, May 2011
Wall Street Journal Cracks in China Housing Push, August 2011; Affordable-Housing Delays Threaten China\'s Economy, June 2011
J P Morgan China’s Housing Imbalance – Is Affordable Housing the  Cure?,September 2010
China Economic Quarterly, Building Homes For the Humble, December 2010