Housing China’s Millions: Passive vs. Active Strategies

China’s real estate community is in a stir over news published in the July 9th edition of the People’s Daily International. Titled “What Does the High Housing Vacancy Rate Mean?” (in Chinese), an economist at the Chinese Academy of Social Sciences estimates approximately 64.5 million currently empty flats in 660 cities in China, excluding those newly built units in developers’ inventories but not yet sold. Given an average household size in China’s cities of 2.28 in 2008 (National Bureau of Statistics of China), those supposedly empty flats could accommodate up to 150 million people. The author argues that many of these empty flats are purchased by speculators, driving a high housing vacancy rate and reflecting the bubble in China’s urban real estate markets.

The author’s number comes from unconfirmed reports from the State Grid Corporation of China that there are 64.5 million smart electric meters in China that have not been running for at least 6 months. There is much controversy in this as, for starters, some say not there are not even that many smart meters installed.

Despite challenges to the data’s accuracy and its source, a high residential vacancy rate caused by speculation in China’s urban real estate market is undeniable. The China Banking Regulatory Commission has been cracking down on multi-home buyers via credit channels (see this Reuters article). Nonetheless, reports that these loans continue abound. At the same time, the housing deficit for lower-middle income and lower income groups who need housing the most but cannot afford market-rate price properties is still huge.

This disparity underlines the mismatch in policy and capital – that a combination of passive policy and corruption have led to unrestrained investment in developments that (1) don’t meet the demand in the market and (2) have fueled dramatic increases in land costs in desirable areas, diminishing the availability of land for affordable housing and socioeconomically diverse urban communities.

This situation also underlines the need for better data on housing and construction in Chinese cities (see analysis below article). There is inadequate clarity on the number of housing units constructed, their geographic distribution and the integrity of the data. Without good data to describe supply and demand, developers will find it difficult to judge the market environment. Along with bad data and rampant urban land grabs (see this New York Times article), the long lead time for projects ensures large imbalances in supply and demand and drastic cycles.

By contrast, at the end of June, the central Chinese municipality of Chongqing announced plans to build 30 million sq m of social housing in the next three years – 10 million per year. The municipality’s objectives are oriented toward smart growth principles in that 75% of these communities should be located in city centers in socioeconomically diverse communities, with the remainder in suburban locations. All developments will be served by public transit, including light rail, subway or bus service. The monthly rent for these social housing units will be 60% of market levels. If the commitment is met, 350,000 lower-middle income and low income households will be housed. This is one-third of the overall lover-middle income and low income population in Chongqing.

However, despite local governments’ determination to satisfy the housing needs of disadvantaged social groups, municipalities have a poor record of meeting these goals, mostly due to tight budgets. Private developers, likewise, hesitate to step in to build affordable housing because of lower returns on this segment – or, potentially, losses due to skyrocketing land prices. Without the proper incentives, regulation, risk-sharing and business models, developers have little reason to participate in social housing projects. In many cases, those “incentives” have been driven by official corruption.

China’s cities still need successful partnership between public and private stakeholders to generate business models that ensure sufficient financial returns for developers while supplying sufficient affordable housing. In the wake of a protracted property bubble bust, as elsewhere, developers may show more enthusiasm for models aimed at lower income markets.

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