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Liu Shijin

Housing Security is Critical for China's Long-term Stability

2014-05-23

People are the foundation of a nation, and a nation can enjoy peace only when its foundation is solid. It is the starting point and goal of China's reform and development to improve people's well-being, and it is also a long-term program which consolidates the country's foundation.

As an important method of improving people's livelihoods,housing security is related closely to people's vital interests. As a result, this year's report on government work emphasized the significance of improving housing safeguard mechanisms and pointed out that the government would take it as its primary mission to increase the proportion of government-subsidized housing, increase spending, improve the quality of secure housing, and ensure its equitable distribution. The work arrangement and specific measures related to housing security in the government work report cast light on the practice of its housing security policy.

Advancing government-subsidized housing construction is the most important people's livelihood project at the present stage

Housing security is of significance in ensuring people's basic living conditions, maintaining social harmony and stability, and boosting economic development. With the rapid advance in urbanization, industrialization and marketization, the permanent population in cities and towns continues to rise. As urban house prices keep at a high level, solving housing problems of low- and middle-income families as well as establishing and improving a housing security system that suits China’s current national situation and development are becoming increasingly urgent. The 2014 Report on the Work of the Government said that the country would build more government-subsidized housing in 2014, with seven million units starting construction and 4.8 million units completing construction by the end of this year. The moves reflect the new arrangements made by the CPC Central Committee and the State Council.

Since the comprehensive reform of the housing system in 1998, the nation's housing security system has witnessed a series of changes. Housing security hadn't been given enough attention, and people's demand for housing has to be satisfied in the commercial residential building market. With the fast development of urbanization and the continuous rise of house prices, a lot of families can no longer afford a house within the market system. Thus the housing problem has become the most pressing issue people are concerned about. As a consequence, the establishment of a housing security system is on the agenda of governments at all levels, and is becoming the most important project for people's livelihoods. Housing security policies make up a major part of the governmental public policies. Since the 12th Five-Year Plan, the country has accelerated its housing security system establishment and set itself the goal of building 36 million government-subsidized housing units within five years. By the end of 2013, as many as 24.84 million units had begun construction, with 15.73 million units having been completed. The year 2013 saw the construction of 6.6 million units and 5.4 million units were completed. If the goal is reached during the 12th Five-year Plan, over 50 million urban families nationwide will be provided with housing, so the coverage rate of urban family housing security will reach more than 20 percent. On that occasion, the structure of China's housing market will greatly change. The government will play a more crucial role in ensuring the housing of low- and middle-income families in cities and towns through the construction of government-subsidized housing.

Continuous increase in government-subsidized housing construction will promote a new type of urbanization which puts people first. The central government convention on rural work last year and this year's government work report both presented three tasks: helping around 100 million agricultural surplus laborers to settle in cities and towns, transforming shanty urban areas and villages inside cities where around 100 million people live, and facilitating around 100 million rural residents to live in the central and western urban regions. In order to accomplish the tasks above, ensuring adequate housing for people settling down in urban cities is of top priority. Consequently, improving the housing security system, enlarging its coverage and bringing new settlers into the system should be the vital tasks for now and in the future.

Put efforts into shanty town renovation to benefit the people and maintain a stable growth. In recent years, local governments across the country have explored a variety of measures to ensure housing security in accordance with local conditions. Apart from various housing security projects such as low-rent housing and affordable housing, the government has started construction of public rental housing, and integrated the operation of public and low-rent housing. All the measures are contributing to a more effective allocation of housing security resources, and are of great help in ensuring the housing of low-income families.

The 2014 Report on Government Work stressed that the government will renovate 4.7 million units in shanty towns, accounting for 67.1 percent of 7 million units that will start construction in 2014, a remarkable increase compared to 40 percent over past years. This shows that the new administration attaches great importance to rebuilding urban shanty areas. Meanwhile, it is also a new measure to address problems of current construction of the government-subsidized housing, and will help to adjust and optimize the structure of security housing.

Over the past years, China's real estate industry has experienced rapid growth, along with a constant increase of urban modernization. Though the cities are witnessing large-scale construction and prosperous development, a considerable number of people still live in shabby urban areas and villages inside cities, suffering from poor housing quality and an inadequate supporting infrastructure. Quite a few cities have stretches of shanty areas that coexist side by side with high-rise buildings, showing a sharp contrast. The trouble is particularly severe in the remote areas of some cities, especially in the mining, forest and reclamation areas. In fact, most people living in the shanty urban areas can hardly afford the housing in the market, and thus they expect to improve their housing conditions through the government-led renovation and housing security projects. Considering the above situation, not long after the new administration took office in 2013, the General Office of the State Council issued its "Proposals on Speeding Up the Renovation of Urban Shanty Towns", putting forward that a total of 10 million units in shanty towns would be rebuilt within five years from 2013 to 2017. It also pointed out that all urban shanty towns as well as villages inside cities would be steadily and orderly rebuilt in addition to large shanty areas. The 2014 report on the work of the government underlined again that the government would "expand the renovation of urban shanty towns", and increase efforts to build a supporting infrastructure, to strengthen urban management innovation and institutional construction.

In terms of funding, the government will continue to increase central government spending on it. Furthermore, departments concerned will implement related policies on the allocation of special funds for rebuilding shanty areas of industrial and mining enterprises. Financing institutions like China Development Bank will also increase loans for it.

It is worth noting that expanding the renovation of urban shanty areas is also a realistic move for maintaining stable growth. In this year, the central government set the economic growth rate target at around 7.5 percent. In the complex international and domestic environment, the economic structure is undergoing profound adjustments, and downward pressure on the economy is still very heavy. Therefore, it is rather difficult to attain growth targets. Under the situation of the economic structure adjustment and excess production capacity, haphazard investment and stimulus policies are undesirable for maintaining growth, for it is quenching a thirst with poison and will result in new conflicts and problems. In contrast, expanding the renovation of urban shanty towns has more advantages. For instance, it will improve the housing conditions of vulnerable groups, alleviate the current disparities within cities, increase the comprehensive carrying capacity of towns and cities, and promote development of related industries. In conclusion, it is a good policy for benefiting the people and maintaining economic growth, advancing the balance of stable economic growth and social harmony.

Innovating housing investment and financing mechanism is the core to improving the housing security system

Currently, the nation invests a lot in large-scale construction of government-subsidized housing, which is a rather heavy task. According to preliminary estimates, a total investment of five trillion yuan is required to attain the construction targets of government-subsidized housing during the 12th Five-year Plan. The highlight and difficulty of housing security work lies in how to raise stable funds at a low cost for a long run, which is also the core issue in practicing housing security policies. This year's government work report says that the authorities will improve mechanisms and instruments for securing investment and financing for policy-related housing and use market forces to provide long-term and steady funding to cover the costs used in building government-subsidized housing.

Although the central government and local governments at all levels have increased financial support to provide adequate housing and made efforts to raise funds via multiple channels over the past years, the large sum of money required for housing security is still not sufficient. Meanwhile, the commercial financial institutions such as banks are unwilling to provide loans for housing security projects due to the huge investment and slow returns. As a result, innovation in investment and a financing mechanism for housing is in urgent need so that the problem of funding for construction of government-subsidized housing can be solved. On the one hand, innovation of financial mechanisms and instruments for policy-related housing should be improved. On the other hand, diversified market operations should be used, combining with social forces in the construction of government-subsidized housing.

1. Innovate policy-based financial mechanism

The so-called housing policy-based financing refers to the financing institutions that hold activities initiated, founded, shared or guaranteed by governments and governmental institutions in housing security to implement and support government's housing policy rather than to maximize profits. And it is a common practice in many other countries to solve the housing problem for residents through housing-policy-related financial institutions, this being a major vehicle for government to get their housing policies carried out. For example, Fannie Mae and Freddie Mac in the US are policy-based financing institutions to provide housing loan guarantees or loans for common and low-income people, making derivatives of their loans and spreading risk. They played an important role in the development of the US housing market. In Japan, the Government Housing Loan Corporation has also played an important role in the development of Japanese postwar housing market and helped low-income families to solve housing problems.

Many of China's existing policy banks and financial institutions provide abundant and low-cost loans in areas such as infrastructure construction, urban-rural integration, import and export, and agricultural modernization. But there are still no policy financial institutions and mechanisms in the housing field so far. With the fast advancement of China's urbanization process, there is strong demand for residential housing and large-scale construction of government-subsidized housing. Taking the international experience as a reference, the housing policy financial mechanisms with Chinese characteristics need to be established as soon as possible to safeguard the stability of low-cost financial support for housing. Decisions of the Third Plenary Session of the l8th CPC Central Committee on comprehensively deepening the reform emphasized policy financial institutions in building urban infrastructure and housing, to promote the urban infrastructure construction and housing construction, renovate the old city and rebuild shanty towns, thus reducing the difficulty of financing and lowering financing costs.

Our nation has had experience in establishing policy financial institutions. Since the 1990s, China has established a mandatory and cooperative system of housing public accumulation funds, introduced the "Regulations on Housing Public Accumulation Fund", and formed an operating mechanism with a management committee making decisions, a management center operating, banks collecting money and financial institutions supervising. It provides strong support for addressing urban residents' housing problems. At the same time, China Development Bank has also played an important role in the construction of government-subsidized housing, by providing loans for local projects. Based on previous experience and a wide survey and investigation, China's policy financial mechanisms can be designed and established.

2. Take various market-oriented measures to raise funds for government-subsidized housing construction

In practice, local governments across the country have explored a variety of market-based ways to raise funds for construction of government-subsidized housing. The first is to encourage developers to construct housing, and then the government buys them back by transferring part of the land revenue or providing a certain amount of financial aid, so that they can gain support from developers and related social funds. Second is to build and operate a housing investment and financing platform sponsored by governments and enterprises, and achieve an overall balance of payment by different project planning and comprehensive development. The third is to raise funds through corporate bonds. In 2011, the National Development and Reform Commission issued "Circulars on Construction of Government-subsidized Housing by Bond Financing", allowing financing platforms and enterprises to raise funds by issuing bonds to support the construction of government-subsidized housing, such as public rental housing. In addition, some places actively innovate financial instruments; for instance, the security housing Real Estate Investment Trusts (REITs), and are allowed to use housing rents and property management incomes as return on investment.

Improving multi-level housing supply system to optimize housing supply structure and implement market classification control

The 2014 report on the work of the government includes innovating and improving multi-level housing supply system and increasing the supply of small- and medium-sized commercial and joint-ownership housing units into the real estate control for the first time. An increase in the supply of small- and medium-sized commercial and joint-ownership housing units will promote the sustained and healthy development of the real estate market, serving as a specific measure to improve a multi-level housing supply system as well as a realistic choice to optimize the housing supply structure and implement market classification control.

With the rapid development of China's real estate market, housing sales have been thriving over the past few years and the price continues to rise. Particularly in first-tier cities and popular second-tier cities, land prices and housing prices soar, and the housing-price-to-income ratio in increasing constantly. The supply of small- and medium-sized housing units at a middle or low price is obviously insufficient. Many people can't afford to buy commercial housing any more. To address problems in the commercial housing market, some cities started to explore a method of multi-level housing supply according to local conditions and launched pilot projects of joint-ownership commercial housing units. The focus is on those who have a stable job and have not purchased a house due to low income, and the immigrant population who meet the requirements of house purchasing. The so-called joint-ownership refers to the fact that the individuals and governments jointly own the house in proportion. The government gives away part of the land transferring fees and both sides have reached agreement on prices and the types of housing. Most of the joint-ownership housing is small- and medium-sized owner-occupied housing. In addition, their housing price is lower than that in the market. Correspondingly, within a certain period, the housing shall not be traded. When it goes into the market, the trade income will be allocated between governments and individuals in proportion.

The joint-ownership housing in essence is a reflection of the government public policy in the commercial housing field. Joint-ownership housing not only provides residents with relatively low-priced ordinary commercial housing to make it affordable for those who are in need, but also improves and optimizes the supply structure of commercial housing in popular cities. In the meantime, joint-ownership housing relieves the pressure on rising housing prices in first-tier and popular second-tier cities, thus stabilizing prices and easing the stress to a certain extent. Taking Beijing as an example, in the second half of last year, a total of 20,000 units of owner-occupied commercial housing with joint-ownership were launched. The year of 2014 will see 50,000 units supplied, accounting for about 50 percent of annual sales of commercial housing, which will significantly alter the structure of the housing supply. Meanwhile, the price of owner-occupied commercial housing will be about 30 percent lower than market prices, playing a large part in relieving the housing price in the Beijing market this year.

The multi-level housing supply methods should be adapted to local conditions. The introduction of joint-ownership commercial housing should also be promoted based on the actual circumstances in different places. With intensified differentiation of local housing markets, the government should have a clearer mind on real estate market control through a variety of methods.

Authors: Ren Xingzhou, Deng Yusong and Liu Weimin, Development Research Center of the State Council

Source: People's Daily, 27-03-2014