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Standard Chartered PLC
The Beijing Star Brand Building Materials West Factory has been demolished, and in its place is a construction pit crawling with dump trucks as cranes tower above. This is the future home of the Taiheyuan Affordable Housing Project, which will have grocery stores, restaurants, and 2,400 apartments for factory hands and other low-income residents.
As growth slows and real estate values slump, Chinese officials are counting on cheap housing to help prop up the economy. The Taiheyuan project is just a tiny piece of a vast national effort to build subsidized housing for the urban poor. Five million affordable apartments are to be built this year, with a goal of reaching 36 million units by the end of 2015. “We will work speedily to improve the system for constructing, allocating, [and] managing … low–income housing,” Premier Wen Jiabao said in a speech on March 5. Leaders in Beijing, though, may encounter stiff opposition at the local level as cities and towns balk at footing the bill and seek more profitable investments for their money.
Social housing, as it is known in China, is not just meant to give the growing numbers of low-income workers and pensioners affordable places to live. It is also intended to boost the steel, cement, copper, and aluminum industries as prices sag and construction slows in the real estate market. With growth in private housing likely to be flat, total floor space for social housing should grow 30 percent to 40 percent this year, predicts Tao Wang, an economist at UBS Securities in Hong Kong. “While the government is trying to manage housing prices down, it does not want the economy to have a hard landing. Social housing can support overall growth,” says Wang. Low-income housing construction will act as a “sedative” for the broader housing market, Vice Premier Li Keqiang said last year.
The combination of artificially low interest rates, a lackluster stock market, and restrictions on investing abroad drove huge sums into the real estate market. Fixed asset investment, much of it in real estate, has grown more than 40 percent annually for the past eight years, says Nicholas Lardy, senior fellow at the Peterson Institute of International Economics in Washington. In 2011 real estate made up 9 percent of gross domestic product, estimates Lardy, far higher than the 6 percent reached in the U.S. at its peak. “The whole growth trajectory of China has been driven by housing investment,” says Lardy. “If you wanted to create a bubble, you would have done exactly what China did.”
Starting in September, the market began to slow. Home sales dropped 18 percent in the first quarter, while housing prices in more than half of the top 70 cities fell in March, the sixth straight month of declines for Beijing, Shanghai, Guangzhou, and Shenzhen. “The property sector is where most concerns lie,” wrote Mark Williams, London-based chief Asia economist at Capital Economics, in a note on April 13. “The biggest near-term threat to growth is that construction activity does stall.”
Social housing may not prove the savior it’s expected to be. The most ambitious program was pushed by disgraced former leader Bo Xilai. The city of Chongqing, which he led, was planning 800,000 apartments at a cost of 100 billion yuan ($16 billion), with construction handled by state-owned developers such as Chongqing City Construction, according to Standard Chartered (STAN). Now the central government has started sifting through the financing of many of Chongqing’s projects, the China Business Journal reported on April 14. “A lot of the new social housing is built in remote areas [of Chongqing]” on the assumption that the city will keep up its torrid growth rate, with GDP up 16.4 percent last year, says Rosealea Yao, research manager at Beijing-based GK Dragonomics. “There is a big question mark on all of this now.”
The financing for social housing is also a concern, with the total bill expected to reach 5 trillion yuan by 2015. In March, Beijing announced it would increase central government funding for low-income housing by 23 percent to 212 billion yuan this year. But the vast majority of costs are likely to be borne by local governments, which depend on land sales for much of their revenue. With China’s real estate sector booming until September, the money rolled in. “Local governments earned 3 trillion yuan last year from land sales,” says UBS’s Wang. Yet the funds allocated to social housing were much smaller, she says. “It’s not that they don’t have the money, it is they rather would spend it somewhere else rather than on social housing, given its small margins.”
Concerns about corruption in social housing have grown in the wake of Chinese media reports showing officials improperly benefiting from programs. Some 80 percent of units are going to well-connected officials and state enterprise managers rather than low-income people, estimates GK Dragonomics. Some question whether China’s urban areas are really meeting their social housing targets. Officials have used a very loose definition of what constitutes social housing, allowing cities to include slum redevelopments and sometimes even factory dormitories and hospital beds in the tally. China’s housing ministry itself conceded that 30 percent of social housing starts last year were not actually new projects. “They may send a bulldozer out and scrape off a little earth and say we have just started 10,000 units. Then they can say to Beijing, look, we have met our quota,” says Lardy.
Attempts to circumvent official targets will likely grow as the real estate sector slows and local land sales drop, points out Lardy. In social housing, “it would require a ramp-up of major proportions to offset a downturn in China’s real estate market,” he says.
The bottom line: A 5 trillion yuan program to build affordable housing faces so many obstacles that it may not boost the real estate market as hoped.