n recent months, Chinese real estate policy has witnessed a major shift away from home ownership toward encouraging renters. The central government has instructed 12 cities to implement pilot programs aimed at boosting the rental market, and some cities have launched their own policies. Beijing and Shanghai, for example, pledged to build 500,000 and 700,000 “rent-only” houses in the next five years. Other cities announced they would grant renters the same access to public services as homebuyers.
More recently, on August 28, the Ministry of Land and Resources and the Ministry of Housing and Urban-Rural Development jointly launched a new pilot program to allow suburban and rural villages around 13 cities, including Beijing and Shanghai, to directly develop real estate projects for the rental market. This could be a real game changer if implemented well.
China’s current laws classify land as either urban or rural, and both have their own legal status. While urban land belongs to the State, which means one cannot “own” but can only “lease” a block of urban land (typically for 70 years), rural land is collectively owned by the inhabitants of each village.
It is prohibited for rural land to be put into urban use. So as China’s cities expand, local governments first appropriate rural land – usually from village councils instead of individual villagers – and then transform the land title to urban. They then sell it to real estate developers for a “land grant fee,” often a hefty one, through auction.
The system is widely considered a fundamental contributor to China’s runaway house prices. It is estimated that land grant fees collected by local governments may account for half of housing prices in China’s largest cities. As local governments have become heavily dependent on land grant fees for revenue, they have had a strong incentive to boost house prices by limiting the supply of urban land and encouraging homeownership by giving homeowners certain privileges, as well as lowering home loan rates.
This has distorted the real estate market and spurred various social problems. It has led to abuse of power and social injustice in rural areas – as local governments often resort to forceful eviction when their appropriation of rural land is resisted by local villagers – and has increased overall debt levels in the financial system, posing an increasingly significant threat to the financial stability of the whole nation.
Under this pilot program, though, local village councils, as representatives of villagers, will be able to directly engage in real estate development designated for the rental market, which means local governments will be excluded from the process. The policy, if effectively implemented, could address the fundamental problems of China’s real estate market to create a win-win situation for both urban and rural residents.
Without huge land grant fees, the number of cheaper rental properties and apartments will increase, which will help cool the overheated real estate market, lowering living costs for urban residents. At the same time, rural communities will have a fairer share of the fruits of China’s urbanization. A healthier real estate market could also help to stabilize China’s financial market and contribute to the sustainable development of China’s cities.
How the program will be implemented in different cities is still unclear, and therefore much of this remains theoretical. Local governments will inevitably see the loss of a major revenue source and it is not surprising to see resistance at local levels.
According to the policy, the pilot program should be fully implemented by the end of 2020. With China’s real estate market at a tipping point, the central government must show the political will to follow through all the way.