20 April 2019
Home purchase restrictions, meant to rein in soaring property prices, have led to surging rental costs. Photo: Reuters
Home purchase restrictions, meant to rein in soaring property prices, have led to surging rental costs. Photo: Reuters

Behind China’s soaring home rental costs

Chinese authorities have adopted a series of measures to restrict home purchases in order to rein in runaway home prices. Now, they have to deal with another problem: surging rental costs.

There are a number of factors fueling rental price gains.

The fundamental problem, ironically, has its roots in restrictive home purchase rules designed to cap home prices.

On the surface, stringent home purchase regulations have helped tame the red-hot property market, but there is a huge side effect: the reduction of supply.

Since developers may not be able to get a sales permit if the pricing for a real estate project is considered too high, they react by slowing down the pace of housing development and launches.

The impact of the reduction in new supply is now rippling across the rental market.

First-tier Chinese cities typically have a large number of migrant workers. These people tend to rent low-cost accommodation such as basements and substandard buildings.

In recent years, local governments have been demolishing these low-cost rental houses in the name of safety enhancement and population control, thus exacerbating the shortage.

In Beijing, for example, an old, 50-square-meter flat can easily cost 8,000 yuan (US$1,167) a month, up nearly 30 percent from the year before. Now, the medium monthly wage is around 6,000 yuan. So even those with decent jobs find it hard to rent a flat in the capital city.

Competition among rental house operators also contributes to the rental surge.

Over the past or so, Vanke (02202.HK), Ping An Insurance (02318.HK), Lianjia and other leading players are all aggressively expanding into the rental market.

As they race to sign up individual landlords to expand their offerings and scale, they inevitably bid up the prices.

This may hurt short-term profitability, but in the Chinese market, the emphasis is typically on gaining market share first even if it means burning cash for an extended period. We have seen the same thing in other businesses such online ride-hailing and food delivery.

This article appeared in the Hong Kong Economic Journal on Aug 20

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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