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Will Housing Projects Boost GDP?
Summary:As developers shun subsidized housing projects and analysts question 2011's construction statistics, can we really pin growth hopes on the 36 million new homes?

EO Quarterly, Autumn Edition, Page 29 [Edition Summary]

By Sun Jianfang (孙健芳)

Translated by Zhu Na

Original article: [Chinese]

China's Housing In Context For 2011
* Cost of Subsidized Housing Construction: approx. 1.3 trillion yuan 
Forecast Government Revenue: 10.3 trillion yuan 
Forecast Gross Domestic Product: 46.2 trillion yuan

China’s plan to build 36 million subsidized homes over the next five years could cost 5 trillion yuan, with investment bank CICC forecasting local governments’ contribution at 2.7 trillion yuan.

The Ministry of Housing and Urban-Rural Development (MOHURD) has put the total cost for 2011, when construction started on 10 million homes, at 1.3 trillion to1.4 trillion yuan.

The government is hoping that its subsidized housing program will kill two birds with one stone – making housing affordable to those at the bottom of society at the same time as stimulating demand and cushioning any slowdown after decades of breakneck growth.

The hopes of a demand boost aren’t just wishful thinking. In the past, the real estate sector has accounted for a major chunk of China’s growth.

When China’s growth dipped below 6.3% during the global recession of 2008, one of the government’s most effective methods for supporting the economy was through the real estate sector. In the second half of 2008, Beijing reduced taxes and used its housing fund to channel larger loans to home buyers, as well as cutting mortgage rates and down payments.

At that time, the housing ministry also announced a plan for investment in subsidized housing to reach 900 billion yuan over three years. They estimated that for every 300 billion yuan that the government spent on subsidized housing projects, private firms would put up another 300 billion yuan, creating two to three million jobs. They also assessed that fixed asset investment would rise by 4.5 trillion yuan and gross domestic product by 7 trillion yuan.

The commercial residential property market was therefore the first to recover in early 2009, with investment in urban real estate between January and May rising 33% to 5 trillion yuan.

The real estate market fed a huge chain of interests from developers to local governments, private investors and home owners. More and more funds flowed from the financial sector into real estate, drawing in almost a quarter of the 22 trillion yuan lent out by China’s 12 publicly-traded banks.

However, as sales restrictions take hold, the housing market has now started to soften. During September and October, which are traditionally the peak period, prices declined.

People are now pinning their hopes on a loosening of the sale regulations, while economists weigh up whether subsidized housing can drive China’s growth.

Public housing and commercial housing aren’t exactly on either end of a seesaw, where one side’s rise would push the opposite end down.

Right now, funding is the main issue for subsidized housing. Local governments’ accounts suggest that they succeeded in raising the necessary funds in 2011, but pressure might build up in upcoming years.

Although the government started construction of 5.6 million subsidized homes in 2010 and 10 million in 2011, there have been no statistics on completions.

In June, the housing ministry said that construction had only started on 34% of the planned subsidized homes for 2011, but people’s suspicions were raised when, within a month, the ministry announced that the proportion had grown to 57%. Similarly, in October 2010, less than half of that year's planned construction had begun.  

The government is likely to be disappointed in its hope that private developers will seize every opportunity to build subsidized homes and its allocation of homes has also been heavily criticized. People in positions of power are responsible for allocating subsidized homes as well as getting first choice once they’re allocated. In Beijing for example, some of the projects have become residential blocks for public servants. 

Given the way government officials are incentivized and promoted, most of them have little motivation to stabilize house prices. This year’s restrictions have driven developers to slow down their land purchases, leading to a decline in revenue for local governments, and strengthening officials’ urge to subvert the sales restrictions.

The government plans to reduce the rate of subsidized home construction to 8 million new projects in 2012, and as its focus shifts to the short-term, the market will become more volatile, local governments will become more risk averse, and banks’ balance sheets will suffer. Perhaps, by then, the subsidized housing project will begin to look like a mirage.

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