Property, Talking Point

Catching fire

How ‘phoenix cities’ are set to power a revolution in property prices

Huang Qifan: man with a plan for the Chinese property market

Empty streets don’t inspire much confidence in a city’s prospects, which was bad news for Dongguan earlier this year when more than two-thirds of its residents disappeared, and for nearby Foshan, where a similar number were missing.

The crucial caveat is that the cities were deserted for just a few days over the Chinese New Year, when hundreds of millions of people make the journey back to their hometowns.

And in fact, the annual exodus may point to solid prospects for home prices in the two cities, according to a major study of China’s property markets published earlier this summer by HSBC.

In ‘Catching phoenixes’, the bank contends that cities like Dongguan and Foshan are going to spur much of the growth in national home prices, taking over from the bigger metropolises.

The report also outlines how demand is going to come from an unlikely source: migrant workers. Defined as people who work away from their homes for more than six months a year, migrants were the foundation of China’s manufacturing miracle in the 1980s and 1990s. Are they going to underpin the next generation of property prices too?

Why focus on migrants?

Analysts have linked anything from a quarter to half of China’s growth to the property sector, where changes in sentiment can reverberate through the wider economy.

In June there was news that home values in Beijing had fallen for the first time in more than two years and that prices in red-hot Shenzhen were stalling, pointing to cooling in the country’s biggest real estate markets.

Reports that the national indices for July were showing the smallest increase in prices since March 2015 sent another shiver through the media.

The official data on house prices comes from the National Bureau of Statistics (NBS), which publishes monthly and annual percentage changes across 70 major cities. But the index can’t convey the patchwork of property markets around the country and how fortunes diverge between urban and rural districts, coastal areas and interior regions, and top-tier cities and smaller towns.

These local realities mean that Chinese property is a multi-speed world in which investors flit between high hopes for the hotspots and lethargy on the laggards. Sentiment surges and subsides across the different locations: last year the most affluent cities led the pack on price increases (see WiC350) but more of the growth this year has come from smaller cities, a trend that we first identified in WiC327.

HSBC’s market review sidesteps some of the shorter-term stimuli and concentrates on deeper-rooted demand. It also digs down into the impact of potential demand from migrants – the 282 million citizens that account for more than a third of the national workforce, according to NBS data.

Michelle Kwok, the report’s author, says that a better understanding of migrant flows can supplement more conventional indicators on a city’s property prices like the impact of policy directives and changes in credit conditions.

The study also sets the stage for what might happen as 10 million new migrants move to the cities every year until 2025. “Clearly, many migrants can’t yet afford to buy a home, but this is likely to change as the government introduces more measures to help them get on the property ladder – another reason to regard migration-driven demand as a long-term driver of the housing market,” she says.

How are the phoenix cities identified?

Publicly available data on migrant numbers is limited so HSBC selects the strongest indicators, focusing on correlations between house price growth and three key factors – job opportunities, access to education, and population density.

Job availability is the most important determinant and tracked by looking for cities where there is a higher proportion of migrants versus ‘usual residents’ (identified as those enjoying hukou status, which gives access to social services barred to outsiders, see WiC88).

A larger proportion of migrants in a city points to plenty of jobs and sufficient incentive for people to stay there even if they do not have hukou rights.

Access to education for migrants’ children is also important, especially the availability of primary school places, which HSBC links to stronger home prices in its sample group. Population density is another significant parameter in suggesting a stronger influx of immigrants in the past. Of course, housing stock in more heavily populated cities is more likely to come under pressure as new arrivals continue, which is another factor in pushing up prices.

Which cities feature as phoenixes?

HSBC looked at 95 locations and it picks out 20 cities that score highest as prospects for a property boom.

Tier-1 cities like Shanghai and Shenzhen weren’t included in the assessment because they have the highest urbanisation rates and are already subject to strong investment demand. Property prices in these places may well rise further, Kwok says, but the reasons are less likely to be migration-driven.

Instead the phoenixes are drawn from tier-2 and tier-3 cities. There are candidates like Ningbo, Jiaxing and Suzhou from the eastern provinces, although northerly candidates such as Qingdao, Jinan and Tianjin also feature. Some are provincial capitals, such as Zhengzhou in Henan and Wuhan in Hubei, but many are not, like Quanzhou in Fujian and Wuxi in Jiangsu.

Notably, a quarter of the phoenixes are from the Pearl River Delta in Guangdong. WiC has written extensively about the region (see last year’s Focus edition for a fuller review of the $1 trillion PRD powerhouse) so the concentration of contenders shouldn’t come as much of a shock. But Dongguan’s position at the top of the rankings might come as more of a surprise, after stories about the struggle to reinvent its manufacturing base (see WiC305) and lose its reputation for seedy nightlife (see WiC226). In the study it grabs top spot as a spillover location from Shenzhen, however, and for hosting a greater proportion of migrants than any other city.

Foshan (ranked fourth on the list) gets a similar boost as an outlier of first-tier Guangzhou, while Zhongshan (number 3) and Zhuhai (number 8) are expected to gain from major infrastructure investment, another accelerator identified in the study. Both are poised to benefit from huge bridges linking them with their more dynamic neighbours on the eastern banks of the Pearl River (see WiC358).

Hoping for a hukou

Another key feature in the debate on prospects for the phoenixes is how to reform the household registration system created in the late 1950s to prevent large-scale migration across China.

Some of the restrictions are being relaxed as part of an urbanisation plan launched by the State Council in 2014, which envisages 100 million migrants getting an urban hukou by 2020, and the Ministry of Public Security says it issued nearly 29 million new urban residency permits last year.

But an obvious challenge in overhauling the system is the expense: the Chinese Academy of Social Sciences estimates that it costs Rmb100 billion ($14.5 billion) in additional public spending for every million migrants granted urban status.

For cash-strapped local governments that is a daunting prospect and many of China’s most developed cities are already trying to cap their permanent populations (see WiC358), filtering out the migrants with eligibility tests based on education levels, tax payments, and working histories (the capital Beijing is being particularly aggressive on this front).

Smaller cities have been more flexible, including Xiamen, which is number two on HSBC’s phoenix list. It was one of the pioneers in relaxing restrictions in 2010, granting healthcare and pension rights to migrants with stable jobs. The city’s population grew by a million people (or 40%) in the same year and the influx of outsiders has persisted, putting upward pressure on house prices.

Indeed, the South China Morning Post reported in July that surging home prices in Xiamen have pushed rental yields to levels well below those of New York and Tokyo in percentage terms, and that investors there will have to wait a hundred years to recoup their outlay in rental incomes alone.

Yet HSBC’s study still pinpoints Xiamen as a property phoenix, prompted by the prospect of more migrant arrivals. Further hukou liberalisation will be an important factor in the fortunes of the other phoenix cities too.

How about the rental market?

Traditionally the Chinese have preferred to buy their homes rather than rent them, with as many as nine in 10 families owning their own properties. But if home prices carry on growing, ownership must surely move beyond the reach of many migrants, especially those living and working in bigger cities.

That means that more of the focus will have to turn to the rental market, which makes up a much smaller fraction of the property sector in China than other large economies.

The government agrees and nine of its ministries contributed to a policy paper this summer outlining 12 cities as pilots for reforms designed to make it more attractive to rent.

Six of HSBC’s phoenix cities are in the pilot group and what’s striking is that some of the policy ideas reflect similar themes to the bank’s study. Concessions in allowing the kids of non-property owners to go to local schools have featured prominently in boosting the rental sector in Guangzhou, for instance, with recommendations that more tenants be allowed to enroll their children, thus reducing the pressure to buy houses in areas with the best schools.

Access to schooling has been identified as a critical issue in pushing migrants to move to places where it is easier for them to get a hukou when aged in their 30s and 40s. Although the assumption is that migrants will be the main beneficiaries of changes to the rental rules, commentators have been calling for reforms that make it more attractive for a wider spectrum of families to rent their homes. The city of Beijing has followed Guangzhou in also opening up school places to migrants that are renting. “The new rules will play a critical role in discouraging speculators and stabilising home prices. In the past a lot of people wanted to buy a house because they needed to send their children to school. Now there is no need for them to buy. We believe that the new regulations will lead to a stable and healthy development of the country’s housing market,” Zhao Chixiu, vice president of the Beijing Real Estate Law Association, told Tencent Finance, a news portal.

Helping the tenants of tomorrow

Critics of the concessions in Guangzhou have said they are too limited, applying only to official residents or highly qualified migrants with acceptable scores on the government’s points-based residency system.

Yang Hongxu, deputy head at E-house China R&D Institute, a real estate firm, doesn’t even think that the changes in regulations will bring down home prices, predicting that interest in “school-district homes” will drive up rents instead. Higher rental yields will then attract more investors to buy the homes, he says.

Yet some 160 million Chinese – the majority of them migrant workers and new college graduates – are now opting to rent, according to figures released by the Ministry of Housing and Urban-Rural Development earlier this year.

Unsurprisingly, demand is strongest in places where homes cost the most to buy. In cities like Shanghai the authorities have also been trying to make more rental options available, releasing eight plots of centrally-located land for rental housing projects last month.

In Hangzhou, rental transactions increased 9% during the first six months of 2017, compared with the same period last year, and the authorities have been trying to make it easier for tenants to find new homes by partnering with Hangzhou-based Alibaba and Ant Financial on an “intelligent home rental platform” to streamline the leasing process and stamp out unscrupulous practices.

The platform piggybacks on Alibaba’s vast experience with Tmall and Taobao, two of the country’s largest online platforms, in offering a user-friendly experience and applying some of its credit-scoring technologies to evaluate landlords, tenants and agents.

Ant Financial then provides the online payment services for transactions on the platform and there are proposals that tenants with higher credit scores should be allowed to put down lower deposits.

“The biggest problem facing China’s leasing market is information asymmetry. The entry of Alibaba, which has changed the way that consumers shop by connecting sellers and buyers directly, could add more transparency to the rental market, which adds a new level of innovation,” Zhou Feng from Lianjia, a property platform, told Yangcheng Evening News.

More ideas for keeping prices down

For inspiration on making property more affordable across the country, policymakers could do worse than listen to Huang Qifan, the former mayor of Chongqing.

Huang is known for spearheading the construction of Shanghai’s financial district in Pudong but later in his career he made a name for himself in Chongqing, where slower but steadier growth in home prices bucked the more volatile national trend (see WiC344).

Huang is now the vice chairman of the National People’s Congress Financial and Economic Affairs Committee, but he is still speaking out on how to fix some of the problems that plague the housing sector. He was one of the earliest to call for renters to be given more of the same local rights as homeowners, for example.

He is now also proposing changes to the way that land is sold by local governments, addressing situations in which there are too many new homes in some cities, and too few in others.

One of Huang’s suggestions is to establish a benchmark of 100 square metres of living space per person. If a city’s population is rising rapidly, the authorities must allocate more land for housing until the target ratio is reached. But if a city has a supply well above the benchmark, they shouldn’t be allowed to sell more land.

Part of the idea is that control over land sales to developers shouldn’t be left to local officialdom. “What happens if they want to set a target that increases the population from two million to five million… but in the end, only one million come?” Huang asked in a recent speech at Fudan University. “Worse, the original two million people have left. Who is going to be responsible for the mismatch?”

The main flaw in this kind of thinking is that city governments rely on income from land sales to plug holes in their tax revenues. Caixin Weekly reports that returns from land auctions brought local governments Rmb3.75 trillion in income last year, or about 30% of revenues. Many cities depend on land sales for a much higher share of their income, so bureaucrats seem likely to resist Huang’s ‘100 square metre’ plan unless the fiscal pressures are resolved too.

Another area where Huang calls for a more flexible approach is low-cost housing, a sector in which the central government’s record has been patchy. Targets set during Hu Jintao’s presidency for 36 million low-cost homes were never reached (see WiC251) and affordable housing seems to have dropped down the list of priorities for the government of his successor, Xi Jinping.

Huang still thinks subsidised housing offers some kind of solution, albeit in modified form. Another of his suggestions is the construction of ‘joint property rights’ schemes in which the government offers partial purchases of housing at prices lower than the market rate. Qualified homeowners would then be given the choice of selling their stakes in the properties at prevailing prices at a later date, or buying out the government’s share of the ownership.

And in another sign that the central government wants to do more to encourage the rental market, the Ministry of Land and Resources joined the Ministry of Housing and Urban-Rural Development this week in pitching another pilot scheme to make it easier to rent homes in major cities, including Beijing, Guangzhou and Shanghai.

Xinhua is reporting that 13 cities are going to allow construction of residential housing on rural land swallowed up by sprawling urban development. Previously, farmers and rural collectives have been forbidden from selling the land to anyone but the state, but the pilot programme creates an opportunity for rural plots to be included in the mainstream land market.

Similar schemes have been proposed in the past and early reviews of the latest initiative say there are strict limits on how much land will be developed. But perhaps significantly, sales are being restricted to sites for rental homes – with tenants in the houses to be built to enjoy access to basic public services. “The move is an attempt to increase rental options and establish a housing system that is fair to both owners and tenants,” Xinhua adds.

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