beyondbrics

Housing for China’s less well-off is a hot topic for those who watch the middle kingdom. As part of its recent 5-year plan, Beijing wants to build millions of new affordable homes across the country, and the project has the personal backing of Li Keqiang (heir to one of China’s two thrones).

Previous efforts have been subject to abuse, as wealthy Chinese faked their incomes to buy apartments at knockdown prices. But a new scheme in Chongqing may have come up with a workable formula.

Here’s our potted explanation of the new scheme and how it works, as laid out in a recent report from Stephen Green at Standard Chartered. The scheme is referred to as ‘Public Rental Housing’ (PRH, or gongzu fang).

• Chongqing will (eventually) build affordable accommodation (PRH) for 2.4m people. Some of that is being fast-tracked.
• Under the scheme, those earning less than Rmb3,000 a month can apply for a PRH unit.
• Occupants will rent the unit at a low price (probably at around 80 per cent of commercial rent, says StanChart).
• Rents in PRH units will rise more slowly than market rents, so that they end up at around 60 per cent of commercial rates.
• After 3 years, tenants will have the option to buy – at a price that covers the land and financing costs. This could be less than half market value.
• If occupants do buy and then decide to sell, the price will be set by the local government – thus removing the incentive to fake income to secure a spot.
• The scheme is aimed at migrant workers, graduates and low-income urbanites.

Here’s why abuse should be limited, according to Green.

The beauty of PRH is that occupants will rent first, and after three years, they will be allowed to buy at a price which covers the construction and financing costs. Huang Qifan, Chongqing’s mayor, has estimated that land costs make up only one-third of the cost of commercially sold apartments – so PRH units should cost their buyers less than half the market price. If the occupier-buyers then sell, they will have to sell back to the government at a pre-determined price. As a result, planners believe that abuse will be limited.

Aside from abuse, the other big issue is how to pay for it. There are a number of funding sources:

• Rent
• Local government contributions (in the form of land)
• Central government contributions (in the form of equity capital)
• Commerical space – shops and restaurants will rent units in the PRH blocks
• Sales – after three years, some residents will buy their units
• Debt

Another key point of the plan is that is doesn’t involve commercial property developers. Instead, the work will be done by state-owned builders – thus removing the need for profits.

Green concludes by pointing to three better paths to affordable housing: get interest rates into positive territory, remove tax incentives that drive local governments to push up land prices, and allow farmers to build low-cost housing on their land.

But there are flaws in the Chongqing system. At 80 per cent of market rent, PRH units will still be beyond many low-income workers; an economic downtown would hit these areas hard, which could lead to crime and urban poverty; abuse of the system will still happen.

But, says Green, the Chongqing option, in the absence of any better plan, offers hope for dealing with China’s housing divide and could well be adopted nationwide.

Related reading:
China’s Tier 2 property trap, beyondbrics
China is world’s top building site, beyondbrics
China’s passion for property lacks the bubble factor, FT
China growth plans to slow commodities, FT