Migrant workers who are able to settle down in big cities are reluctant to purchase property back in small cities and towns, creating a challenge for the government’s destocking plan.

 

To reduce the surplus of housing inventory in cities, participants in the Central Economic Work Conference last December recommended allowing migrants from the countryside to register as urban residents, enabling them to buy or rent property.
 

Around the same time, US President Barack Obama signed into law a measure easing a 35-year-old tax on foreign investment in US real estate. It contains a provision that treats foreign pension funds the same as their US counterparts for the purposes of real estate investment. The new law also raises the cap for the investment share of foreign pensions in publicly traded US real estate investment trusts from 5 percent to 10 percent.

Though the two policies intend to address different issues, we might be able to figure out some feasible means of stabilizing China’s ailing housing market by comparing them.

 

Urbanization strategy
China’s plan to reduce housing inventory addresses problems at the regional level. In particular, it targets over-urbanization caused by surpluses in the real estate markets of third- and fourth-tier cities.

At present, reform of China’s housing market will certainly affect the overall strategy of urbanization because if there is no new demand to consume the housing inventory that was created during earlier phases, subsequent urbanization is likely to waste large amounts of land, perpetuating a vicious cycle of constant rural land requisition.
 

If this trend continues in the property market, developers and banks will suffer broken capital chains, and migrant workers, who constitute the surplus rural labor force, will find it difficult to transfer into the non-agricultural sector. This hints at excessive urbanization.
 

As a consequence, the measures that China rolls out are meant to meet the needs of new city residents, effectively enlarging demand and stabilizing the real estate market. Such a move is obviously a strategic consideration to encourage migrant workers to purchase property.
 

In fact, a major goal of the new model for urbanization is to settle 100 million agricultural workers and other residents of the countryside in cities and towns. Assuming that there are four to five residents per household, a surplus labor force of 100 million will produce demand for more than 20 million units of urban housing.

In the next five years, if 70 percent of the 100 million people buy homes in town, there will be a total demand for 2.31 billion square meters of housing based on an assumed housing demand of 33 square meters per capita.
 

Taking into account the disparities that separate third- and fourth-tier cities from rural areas, such an increase in demand will largely consume the present housing inventory as well as new projects in these areas. That is to say, if the plan works, it will be a successful example of supply adjustment in China’s housing policy.

 

Problems facing homebuyers
However, the potential homebuyers targeted by the policy—namely urbanized workers from the countryside—might be reluctant to purchase property. One reason is that the excess housing inventory in third- and fourth-tier cities is usually concentrated in suburban areas and agricultural land that was only recently developed, so there is a shortage of public services and employment opportunities. For farmers, living in those areas is not equal to a fundamental change in their identity.
 

There is also a paucity of credit and cash on hand among migrant workers, which could prevent them from purchasing property. Though the rural population is large, their main sources of income are minimum wage jobs and farming. The current average income in third- and fourth-tier cities puts the goal of owning a home beyond their reach.

Alternatively, some migrant workers try to make a living in first- and second-tier cities and then buy homes in third- and fourth-tier cities. The problem is that if this crowd is able to find stable jobs in big cities, they may not purchase property back in small cities and towns.
 

Furthermore, it should be noted that the government is unlikely to allot a large amount of funding or to construct infrastructure and public services for real estate in third- and fourth-tier cities. For example, the cost of buying an 80-square-meter apartment in small cities, if calculated according to the average price of 5,000 yuan (around $770) per square meter, has reached 400,000 yuan.
 

Unless the government subsidizes up to 30 percent or more of the purchase price, the migrant population will still be hesitant to purchase. Assuming that each new purchase of housing will be underwritten by a 120,000 yuan subsidy, the government will have to spend 480 billion yuan on financial subsidies for the 4 million newly added housing units in 2015 alone.
 

In light of this fact, it is impossible for government intervention to alleviate problems of excessive inventory in the property market that have emerged in recent years. Moreover, it would go against the goals of reform, which aims to let the market play a more decisive role in the allocation of resources.
 

Finally, small and medium-sized cities mimic the sprawling urban growth patterns of big cities, adding more pressure to reduce housing inventory. According to a report published by the Chinese Academy of Social Sciences in September 2015, 90 percent of the 287 cities in China were described as “less than healthy,” while resource shortages, rampant environmental pollution and other “urban diseases” are quite common.

 

International capital
The relaxation of real estate taxes in the United States will attract mature investment funds, such as pensions, as well as international capital, especially China’s housing investment.
 

According to a National Association of Realtors report in June 2015, Chinese buyers are among the biggest players in the US real estate market. In the fiscal year ending March 2015, Chinese buyers spent $28.6 billion, an increase of 30 percent from the previous year, and residential property accounted for the majority of purchases.

The new law will no doubt draw more housing investment from China. By taking the US tax reform as a starting point, we might be able to resolve China’s housing surplus from a global perspective and achieve a policy breakthrough.

One crucial step is to reform property rights so that they more closely conform to international conventions and extend the duration of leases. Buyers of residential properties are currently granted a lease that lasts 70 years, after which ownership reverts back to the State. China does not have to adopt the system of private property rights that is found in Western countries, but it can extend the duration of leases so that homebuyers get a greater return on their investment.
 

Such an initiative would not create an intense conflict between the property rights system and State-owned urban land or the collective land in rural areas. It would also bring some stability to the expectations of homebuyers and homeowners.
 

The next step is to break down the institutional barriers that prevent foreign capital from entering China’s property market and actively seek international funding to resolve China’s surplus housing inventory. Currently, the domestic demand in the housing market is huge, but the inadequate wealth of the agricultural population is a reality. Government guarantees and bank loans are of great help to those who invest in the real estate market, but not for migrant workers.
 

By actively introducing foreign capital, proper management and promoting cooperation with social capital, particularly foreign capital, the central and local governments might find an effective means to share the financial burden of surplus housing inventory.
 

The United States has been extremely careful about protecting domestic buyers and restricting real estate investments, but it passed the new law easing a 35-year-old tax on foreign investment, which is not only a policy innovation but also a risk-sharing measure.
 

Furthermore, a greater emphasis needs to be placed on the concept of people-oriented urban development. Also, housing and public service projects in third- and fourth-tier cities need to be bundled together to attract international investment. In the spirit of people-oriented urban development, the government should enhance the overall livability of cities through comprehensive management of space, industry, planning, construction, production, ecology and other aspects of life.
 

In fact, many real estate developers today pursue these values of urban development, but the third- and fourth-tier cities still retain a substantial amount of housing inventory. Due to the complex local conditions in different regions, we should not jump to any conclusions in terms of the overall housing surplus.
 

However, it is certain that the Chinese housing market is falling a bit off track. Therefore, the purpose of introducing foreign investment, stepping up housing management and constructing public service facilities is to fill in what is missing, namely the emphasis on the comfort and livability of cities in the process of urbanization. By injecting foreign capital, we might bring about a qualitative change in urban management.

 

Wu Yin is from the School of Economics at Southwestern University of Finance and Economics.