Developing a new model for housing

The recently concluded Central Economic Work Conference paid special attention to the real estate industry, especially because the near collapse of property giant Evergrande has caused panic across the industry in China and alarmed stock exchanges around the world.

Many analysts expected the economic work conference to substantially relax the stringent property market regulations in force since 2016, and intensify the on-going deleveraging of the real estate sector. Instead, the conference just pledged to stabilize the economy while pursuing higher-quality development in 2022. Talking about the property sector, though, the conference reiterated that "housing is for living in, not for speculation", indicating that the government is still trying to curb speculation in the sector and keep a lid on housing prices.

Yet the statement issued by the conference has a seemingly softer tone, in some places, when referring to the property market, even saying the realty sector could be encouraged if it "caters to meet the reasonable demand of homebuyers". The statement urged local governments to adopt city-specific policies to facilitate the healthy development of the real estate sector, and said that the government is "exploring a new development model" for the sector.

The fact that the government is exploring a new development model for the realty sector reflects the Chinese leadership's dissatisfaction with the current development model. China's housing sector plays a crucial role in the national economy and has been a key driver of growth since the initiation of market-oriented reform in the urban housing industry in the late 1990s. Despite that, the industry has been viewed as a major source of systemic financial risks, largely due to the traditional development model of the Chinese real estate sector.

The traditional model has three principal features: high-leverage financing, high-turnover operation and high-speed growth. By adopting the high-leverage financing and high-turnover operation models, developers can achieve high-speed growth during upward market trends but may become very vulnerable when the market is in decline and easily get mired in debt. And this is exactly the reason behind Evergrande's default crisis.

Of late, Chinese regulators have become increasingly concerned about the potential damage to the entire economy if highly-indebted property giants go bankrupt. The "three redlines" policy, aimed at deleveraging the balance sheets of property developers, was introduced last year to strictly curb bank loans to real estate developers.

Since the high-leverage financing model adopted by many Chinese realty developers is not only built on excessive loans from financial agencies but also dominated by the pre-sale system, housing mortgage loans have also been restricted in recent years.

Apart from curbing speculation in the realty sector, the government has also been exploring a new development model for the real estate sector for the past few years. For example, it has made painstaking efforts to strengthen the rental housing sector, which the conference highlighted, and initiated more government-subsidized housing projects.

While the 2017 Central Economic Work Conference emphasized the importance of developing a housing system where rental housing and home-buying are treated equally, the 2018 conference pledged to promote the healthy development of the real estate sector, and the one held in 2019 stressed the importance of increasing the supply of rental housing and building more affordable housing in metropolises, in order to help solve the housing problem.

Also, after the State Council issued the "Opinions on Accelerating the Development of Affordable Rental Housing" in July this year, many cities have accelerated the development of affordable rental housing as part of overall housing development during the 14th Five-Year Plan (2021-25) period.

The government has also experimented with allotment of more plots for building residential units. In particular, it has facilitated the marketization of rural collective land for construction, signaling the end of State-owned land's monopoly in the supply of land in urban areas. The Land Administration Law, introduced last year, allows the direct sale of rural collective land, which will alleviate the shortage of construction land in large cities and prompt developers to build rental housing at relatively lower costs, which in turn will ease the housing problem.

By allowing the construction of rental housing, not ownership housing, on rural land, the government aims to make housing relatively affordable for young people in big cities without directly disrupting the property market. In fact, the marketization of rural land for housing construction can be part of a new development model for the real estate industry.

In 2022, the government will likely explore some more development models for the real estate sector, possibly by launching some pilot programs at the local level, while the introduction of a comprehensive property tax remains a policy option.

Chen Jie is a professor at the School of International and Public Affairs, and director of the Center for Housing and Urban-Rural Development, Shanghai Jiao Tong University; and Liu Wendao is a PhD candidate at the School of International and Public Affairs, Shanghai Jiao Tong University.

The views don't necessarily reflect those of China Daily.