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Special Report

Real Estate Reform with Chinese Characteristics

One of China’s most experienced real estate experts weighs in on the nation’s mammoth reform effort

By NewsChina Updated Oct.1

At the central government’s 2017 conference for economic affairs held in December 2016, Chinese President Xi Jinping’s comments about homes being for living in, not for speculating on triggered a nationwide campaign to curb soaring house prices by beefing up the rental market.  

But in a nation where most still see home ownership as a prerequisite for marriage, standardizing and balancing the housing and rental markets will take time. Gu Yunchang, deputy head of housing policy at China’s Ministry of Housing and Urban-Rural Development, is not optimistic about new measures undertaken by some local governments to reach these aims. Gu, who also heads the National Association of Real Estate Chambers of Commerce, is particularly skeptical of the concept of “equality between renters and homeowners.”  

NewsChina: Some cities have recently announced they will grant renters the same rights as homebuyers. What do you think of that idea? 

Gu: Current measures for curbing housing prices focus on developing and promoting the rental market. We have to make clear why we have to do this before we talk about the “equality” policy. 

I think developing the rental market aims to improve the supply structure of the real estate market, namely, enabling residents to choose freely whether to buy or rent an apartment. A sound housing system should supply the apartments both for commercial sales and for assisting low-income people. However, the current rental market lags far behind the sales market.  

Judging by worldwide practice, a sound rental market can help ease the pressure of buying an apartment – people won’t have to make large down-payments to find somewhere to live. A sound rental market is also a good way to attract outside talent. 

NC: Why does China’s rental market remain underdeveloped? 
Gu: There are three reasons behind that I think. Firstly, people, especially families who have a young unmarried daughter, still hold the traditional idea that owning an apartment is a must for marriage. Secondly, the chaotic rental market offers no certainty that it can protect the rights and interests of either renters or landlords. Thirdly, rocketing housing prices have brought about a hugely unreasonable price-to-rent ratio. Sales prices are five or 10 times what they were 10 years ago, and house owners would rather stock up on apartments as an investment than rent them, since the profit from selling an apartment is much higher than renting it. 

NC: How should we solve the problems? 
Gu: To overcome traditional ideas, to protect renters and landlords by standardizing the rental market, and to curb soaring housing prices to reduce real estate investment. We cannot bypass the three problems I mentioned earlier if we are trying to house every resident. “Equality between tenants and homeowners” is one way to standardize the rental market that will hasten the market’s development if we also control housing prices.  

NC: What’s the logic behind the government’s new measures to develop the rental market? 
Gu: Currently, many rental apartments are supplied by State-owned companies under the orders of the government, which define a lot of land as being exclusively for rent before allocating it to these companies. Personally, I think a mature rental market should be dominated by individual or smaller landlords.  

I am not optimistic about the “equality” policy being implemented in big cities like Guangzhou and Beijing, since I think the new policy should be based on reform of the hukou system, which is hard to achieve in big cities. [Hukou is a system of permanent residence permits which confer many of a Chinese citizen’s rights, such as medical care, pension access, children’s access to schools and are principally conferred at birth.] 

NC: Do you think the “equality” policy, alongside faster rental market development, will reduce housing prices? 
Gu: The real estate market has two rationales: to adequately house residents, and to stabilize housing prices for a sustainable and healthy market. The current market has supplied too many commercial apartments, while options have dwindled for low and middle-income earners and for “new citizens” [Chinese migrants who have lived and worked in another city for a long time]. The “equality” policy and Beijing’s “co-owned apartments” [where apartments are jointly owned by the buyer and the government, with buyers only having to pay for their share] are trying to fill the supply gap, which is actually a supply-side reform. We need a long-term framework to guarantee reform. 

NC: How can we make such reform happen?  
Gu: We should first increase rental apartment supply and then standardize the market using legislation.  

NC: What does China’s future real estate market look like in your view?  
Gu: The future Chinese real estate market is expected to service the maximum number of people, supply commercial and rental apartments for middle-income people and also meet the demands of low-income people. In order words, the market should meet the demands of different stratas of society. That is what we call a supply-side reform.  

Meanwhile, given the rising rate of urbanization, we have to place special emphasis on housing “new citizens.” Specifically, we should distinguish between policies for big and small cities – in big cities where migrants concentrate, we have to supply many more rental apartments than commercial ones, while in small cities, we could focus on the sales market.  

I think China’s status quo and the demands of urbanization will create real room for the development of the real estate market. However, major structural reform is not an overnight task but needs five to 10 years or even longer to realize.  

I personally believe that by 2030 we will see a sound Chinese real estate market in which the rental and sales markets develop equally under tailored policies in different cities.