Can rental reform cool home prices in China?

August 07, 2017 13:37
Hangzhou is one of the 12 cities chosen for the pilot rental reform program. Photo: World Enterpreneurship Forum

Chinese authorities have unveiled a pilot rental reform program in a bid to tame skyrocketing home prices.

Twelve cities, including Shenzhen, Guangzhou, Nanjing and Hangzhou, have been chosen for the pilot scheme.

Under the scheme, tenants will be given the same access to the city's educational and healthcare resources, among other benefits, that residents enjoy, according to a statement from the Ministry of Housing and Urban-Rural Development.

The pilot program is expected to be rolled out nationwide in the future.

Since 1949 China has adopted a so-called hukou or household registration policy. The system is necessary because cities vary widely in public service resources. For example, Beijing and Shanghai have the nation’s best educational and healthcare resources. A large number of Chinese citizens would flood into these big cities if there are no hukou restrictions.

But the hukou system is also being blamed for the growing disparity and huge wealth gap between urban and rural areas, with the people in the countryside having less in educational and healthcare services as well as employment opportunities.

Many who were born in underdeveloped rural regions aspire to become citizens of big cities. To do that, they have to find a decent job, buy a house and pay local social security funds for around five straight years.

Specific requirements vary from city to city. For example, Shanghai requires applicants to earn double the city’s average income, and contribute to the local social security fund for seven straight years. Also, they have to own a home in the city.

This hukou-related demand is one of the factors driving up home prices in first-tier cities.

Although the new measure may encourage the development of China’s housing rental market, given that home ownership is no longer a precondition, it may not necessarily lower home prices.

First of all, rental demand will also drive up the yields of properties and, eventually, their prices.

Secondly, Chinese are obsessed with property ownership. Many buy property as an investment while some feel safer to live in their own homes.

This article appeared in the Hong Kong Economic Journal on Aug. 4

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist