Analysis: Housing Reform Policy Will Reshape China’s Real Estate Landscape

A man crosses a bridge near an apartment complex in Beijing on Dec. 1, 2020. Greg Baker/AFP via Getty Images

Against the backdrop of successive real estate industry defaults and the early signs of a market bubble burst, the Chinese Communist Party (CCP) has rolled out a series of groundbreaking “housing reform” policies, sparking much debate.

The policies call for a dual-track system emphasizing affordable housing, which signifies a significant departure in the Chinese real estate market.

However, analysts are raising concerns that these reforms might destabilize real estate developers and trigger a precarious market collapse, simultaneously curbing the investment attributes of housing and potentially shrinking the wealth accumulated by Chinese citizens over the past two decades.

The housing policy, titled “Guiding Opinions on Planning and Building Affordable Housing,” received approval during the CCP State Council’s executive meeting on Aug. 25, designated as Document No. 14. The policy was officially issued on Sept. 1. It has sparked widespread discussions since its disclosure by the Economic Observer network on Oct. 26.

The new housing reform policy has two primary objectives: first, to increase the construction and supply of affordable housing in major cities, raising the overall proportion of affordable housing supply; second, to redefine improvement-type housing, commonly known as commercial housing, by emphasizing its commodity attributes and limiting its financial investment nature.

Improvement-type housing constitutes about 40 percent of the market share, while affordable housing, public rental housing, and low-cost housing together occupy 60  percent, dominating the housing market.

Key Aspects of Document No. 14

1. Affordable housing targets three main categories: the middle and low-income working class, new graduates, entrepreneurial groups, and talents introduced by the government. Individuals without a house can apply but are limited to purchasing only one. If someone resigns or leaves their job, the local government will repurchase the affordable housing.
2. The operation of affordable housing follows the principle of “guaranteeing minimal profit over cost,” with the sale price determined by the cost of allocated land, construction cost, and a calculated profit. Land for affordable housing will be supplied through allocation, only paying the corresponding land cost. The policy also encourages the use of lawfully reclaimed but unbuilt land, including land from bankrupt real estate enterprises and commercial housing.
3. Cities with a population of over 3 million, covering 35 cities, will implement these housing reform policies, encompassing major first and second-tier cities like Shanghai, Beijing, Shenzhen, and Guangzhou.

Analysis: Potential Impacts and Concerns

Some analysts argue that the slogans proposed in the new housing reform are idealistic and may be unrealistic, especially when introduced during a precarious moment in the Chinese real estate market. They fear that these measures could lead to a comprehensive collapse of the industry.

Commentator Wen Zhao expressed concerns that the policy might accelerate real estate company closures, leading to a massive reduction in wealth for Chinese citizens. He suggests that, in the current downturn of the real estate market, developers hope for government support in lifting price controls, allowing them to offer discounts and attract essential buyers, thereby mitigating the current crisis.

Mr. Wen believes that if the government requisitions inventory from bankrupt developers and sells it as low-priced affordable housing, essential buyers may be drawn away, cutting off a crucial lifeline for developers and triggering a widespread collapse of the real estate industry, leading to a fiscal crisis in China.

Despite Document No. 14 being officially finalized by the CCP as early as Aug. 25, its public disclosure came two months later. Notably, after its formalization, the CCP introduced a series of policies loosening real estate market regulations from September to October. This apparent contradiction has led some to question the government’s intentions and the potential impact on latecomers in the real estate market.

Unfinished apartment buildings at China Evergrande Group's Health Valley development on the outskirts of Nanjing, China, on Oct. 22, 2021. Qilai Shen/Bloomberg via Getty Images

North American investment advisor Mike Sun told The Epoch Times that the new housing reform policy, restricting investment in housing, fundamentally alters the market dynamics.

Mr Sun asserts that over the past 20 years, the majority of Chinese wealth has come from real estate, and this policy implies a significant departure from the traditional means of accumulating wealth, potentially leading to wealth shrinkage or collapse. However, this housing reform reminds people of Xi Jinping’s idea of “common prosperity.”

Mr Sun also questions the financial viability of building large-scale affordable housing, considering the significant financial difficulties and heavy debts at the local level currently faced by the affordable housing sector, which accounts for 60 percent of the construction market. With local governments heavily reliant on real estate for fiscal revenue, the loss of this major income source could accelerate the financial collapse of local governments already burdened with towering debts.