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Well-connected profit from cheap houses
August 5, 2011, Friday
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CHINA began accelerating construction of public housing units in 2008 and intends to build or renovate 10 million units this year. By 2015, if the government meets its target of 36 million units, social housing will be available for 20 percent of urban households, compared with 7 percent today.
The trouble with public housing initiatives often boils down to money. Despite their addiction to commercial real estate and showcase public facilities, many local governments contend they lack the means to finance social housing projects.
With local government debt estimated at more than 10 trillion yuan ever since China's big splurge on recession-fighting construction in 2008, local finances are indeed strained.
There's a deeper cause to the problem than meets the eye. Given their own heavy investments in real estate, local governments are loathe to do anything to hurt the commercial market, particularly since as much as half of the cities' revenues comes from land sales and property taxes. There's concern that once they do allocate land for social housing, property prices in their surrounding neighborhoods could also take a hit.
Most property developers - state-owned or private - are also reluctant to be involved in social housing, a public good with low profit margins. But they may be persuaded to move in that direction if they can get easier access to credit and land.
Critically, developers that help local authorities by building affordable housing might be enticed by the promise of a better chance at gaining permission to build on land for future commercial residential projects.
So far, the mammoth municipality of Chongqing, a hilly industrial center perched above the upper stretches of the Yangtze River with a population of 28 million, has led the push toward affordable housing.
Aiming to reach 2.4 million residents eventually, Chongqing's program focuses on public rental housing and is restricted to individual applicants with monthly incomes of 2,000 yuan or less or family applicants with monthly incomes of 3,000 yuan or less, says Chen Jie, director of housing policy studies at Fudan University's School of Management in Shanghai.
BMW cars
As in other cities, previous housing schemes in Chongqing that enabled applicants to buy apartments at a discount to market prices were often abused. "BMWs were regularly seen parked outside [social housing complexes], suggesting the well-connected were getting preferential access," says Stephen Green, China economist and head of China research at Standard Chartered Bank.
"The beauty of public rental housing is that occupants will rent first and after three years, they will be allowed to buy at a price that covers the construction and financing costs," he noted in a report titled, "Chongqing's 2.4 Million New Renters."
While experts generally applaud the design of the program, it's too soon to say whether it's a model others should replicate. Chen says the municipality could be taking on a worrisome level of debt - Chongqing and the central government are covering about 30 percent of the program's costs, with the rest paid for with bank loans.
In Shanghai, authorities are planning to increase their focus on "economic use housing" - that is, homes that are sold, rather than rented, at below-market prices. EUH will comprise 40 percent of its overall affordable housing program in the next five years, with the remainder involving various rental schemes.
But there is a mismatch between the type of units the program is providing and what low-income locals need. With units selling for as much as 8,000 yuan per square meter and with the average apartment being 60 square meters, "it is too expensive for lower income families," Chen says.
Once cities get past the debate of who pays for and builds the housing, the next difficulty is over who qualifies for it. But deterring abuse by government officials and the well-connected is hard.
In one notorious case reported last year, in an industrial town in central China's Shanxi coal belt, a new complex of smart apartments was on the local government's list of designated social housing.
Almost all 1,578 apartments were reserved for local officials, some of whom quickly resold the apartments at considerable profit before construction was completed.
"[Those] officials divide the profit among themselves," says independent economist Andy Xie. "If they do a project for the common people, the buildings often will be poorly built in the middle of nowhere...."
(This is the second and final part of an article adapted from China Knowledge@Wharton, http:www.knowledgeatwharton.com.cn. To read the original version, please visit: http://bit.ly/oh8JUq)
The trouble with public housing initiatives often boils down to money. Despite their addiction to commercial real estate and showcase public facilities, many local governments contend they lack the means to finance social housing projects.
With local government debt estimated at more than 10 trillion yuan ever since China's big splurge on recession-fighting construction in 2008, local finances are indeed strained.
There's a deeper cause to the problem than meets the eye. Given their own heavy investments in real estate, local governments are loathe to do anything to hurt the commercial market, particularly since as much as half of the cities' revenues comes from land sales and property taxes. There's concern that once they do allocate land for social housing, property prices in their surrounding neighborhoods could also take a hit.
Most property developers - state-owned or private - are also reluctant to be involved in social housing, a public good with low profit margins. But they may be persuaded to move in that direction if they can get easier access to credit and land.
Critically, developers that help local authorities by building affordable housing might be enticed by the promise of a better chance at gaining permission to build on land for future commercial residential projects.
So far, the mammoth municipality of Chongqing, a hilly industrial center perched above the upper stretches of the Yangtze River with a population of 28 million, has led the push toward affordable housing.
Aiming to reach 2.4 million residents eventually, Chongqing's program focuses on public rental housing and is restricted to individual applicants with monthly incomes of 2,000 yuan or less or family applicants with monthly incomes of 3,000 yuan or less, says Chen Jie, director of housing policy studies at Fudan University's School of Management in Shanghai.
BMW cars
As in other cities, previous housing schemes in Chongqing that enabled applicants to buy apartments at a discount to market prices were often abused. "BMWs were regularly seen parked outside [social housing complexes], suggesting the well-connected were getting preferential access," says Stephen Green, China economist and head of China research at Standard Chartered Bank.
"The beauty of public rental housing is that occupants will rent first and after three years, they will be allowed to buy at a price that covers the construction and financing costs," he noted in a report titled, "Chongqing's 2.4 Million New Renters."
While experts generally applaud the design of the program, it's too soon to say whether it's a model others should replicate. Chen says the municipality could be taking on a worrisome level of debt - Chongqing and the central government are covering about 30 percent of the program's costs, with the rest paid for with bank loans.
In Shanghai, authorities are planning to increase their focus on "economic use housing" - that is, homes that are sold, rather than rented, at below-market prices. EUH will comprise 40 percent of its overall affordable housing program in the next five years, with the remainder involving various rental schemes.
But there is a mismatch between the type of units the program is providing and what low-income locals need. With units selling for as much as 8,000 yuan per square meter and with the average apartment being 60 square meters, "it is too expensive for lower income families," Chen says.
Once cities get past the debate of who pays for and builds the housing, the next difficulty is over who qualifies for it. But deterring abuse by government officials and the well-connected is hard.
In one notorious case reported last year, in an industrial town in central China's Shanxi coal belt, a new complex of smart apartments was on the local government's list of designated social housing.
Almost all 1,578 apartments were reserved for local officials, some of whom quickly resold the apartments at considerable profit before construction was completed.
"[Those] officials divide the profit among themselves," says independent economist Andy Xie. "If they do a project for the common people, the buildings often will be poorly built in the middle of nowhere...."
(This is the second and final part of an article adapted from China Knowledge@Wharton, http:www.knowledgeatwharton.com.cn. To read the original version, please visit: http://bit.ly/oh8JUq)
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