Flat broke

China’s new affordable housing policy explained

Flat broke

Premier Wen Jiabao made headlines last week with plans to build 10 million affordable homes this year and a total of 36 million over the next five years for people shut out of the property market by runaway prices. Here we explain why this is such a big deal.

Seems pretty serious this time?

Assuming three people to an apartment, the new figure is enough to house the combined populations of France, Australia and Canada. But critics are sceptical, as authorities have struggled in recent years to deliver on targets for so-called ‘affordable’ housing. In 2009, only two-thirds of a planned 3.1 million units of new low-cost housing were actually built. State media also reported that the government fell short of last year’s target of 5.8 million new affordable homes.

Beijing is also likely to face resistance from local governments, which have shown little enthusiasm for allocating land to low-price affordable projects when they can make more money (to plug their budgetary needs) by selling land to luxury developments.

Where’s the money coming from?

The question on everyone’s mind is who will foot the bill. The Ministry of Housing says it is going to cost at least Rmb1.3 trillion to construct that many houses. That’s equivalent to about a third of the size of China’s stimulus package during the global financial crisis. Beijing says the central and local governments will provide Rmb500 billion of the total Rmb1.3 trillion (but only a quarter of that is budgeted to come from Beijing). The remainder is to come from “companies and institutions in society,” as well as payments by the recipients of the affordable housing, says Qi Ji, deputy minister of housing and urban-rural development. But state-owned banks, which are expected to provide a lot the finances, have been slow to show support. Most are reluctant to lend in light of Beijing’s recent crackdown on loan growth. So far only the China Development Bank has stepped forward, agreeing to loan the Ministry of Housing Rmb100 billion this year to help finance the project, says Caixin.

What about property developers?

Beijing is also counting on investments from property developers, but they haven’t been particularly keen to participate either. That’s no surprise, because they can achieve better margins by selling apartments for the top end of the market.

Moreover, the government’s big push on social housing will bid up the cost of land, labour and building materials, squeezing the margins of listed developers. Pan Shiyi, chairman of SOHO China, one of the country’s largest private property developer, predicts that the glut in supply will lead to at least half of the country’s developers going out of business in the next three years.

Pan said on his blog that his company will not participate in affordable housing developments unless the government offers incentives.

So who can apply?

Cities apply slightly different criteria to assess whether residents are eligible for affordable housing, typically focusing on both net worth and annual income. In Shanghai, families of three or more must have per capita disposable annual income of less than Rmb34,800 ($5,126) and per capita assets of less than Rmb90,000 to be eligible. Applicants also need to prove that they haven’t sold or transferred housing to non-family members in the past five years.

However, affordable housing projects are notoriously a hotbed for corruption. Many local governments have used low-income housing as a front to provide public officials with sweetheart property deals (see WiC60). One property development in Xinzhou, Shanxi, was on the local government’s list of designated social housing. But almost all the apartments were reserved for local officials, some of whom have already resold them at considerable profits before construction is completed, the Financial Times reported.

Will measures cool the market?

Too soon to tell. Although property developers are worried that the wave of cheap housing will crush the market. Some have started offering discounts on new projects, with some more than 20% lower than the original prices.

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