Housing market faces division

House rents have increased significantly in major cities in the past year, which has seriously affected people's livelihood and deserve more attention in the ongoing Two Sessions.

National Bureau of Statistics data show rents in January 2014 increased 4.6 percent year-on-year, and demand for rental housing increased in Beijing, Shanghai, Shenzhen and Guangzhou (the latter two in Guangdong province) after Spring Festival.

According to Soufang, a real estate information portal, the average rent for 11 cities, including Beijing and Shanghai, was 2,742 yuan ($446) a month in January, an annual increase of 5.37 percent, much higher than the increase in the consumer price index.

But despite the buoyant demand for rented homes, some experts fear that the housing market bubble will soon burst. In fact, housing prices have already dropped in some places. For example, angry homebuyers smashed the sales office of a housing project in Hangzhou, Zhejiang province, because housing prices dropped after their purchase.

The two trends may seem contradictory but are related, indicating that the housing market is undergoing bifurcation-geographically between first-tier and third-or fourth-tier cities, as well as sector-wise between owner-occupied and rental housing markets.

The geographical bifurcation can be attributed to uneven urbanization. Urbanization in China is not only about rural to urban migration but also relocation of the workforce from less developed regions to the coastal region and from small towns to metropolises. The economies of first-tier cities are being upgraded through economic restructuring with greater policy advantage and stronger agglomeration effect-or, as American economist Edward Glaeser says, "triumph of the city".

Public services and amenities are concentrated at the top of the urban hierarchy, leading to greater concentration of population in cities such as Beijing and Shanghai. Long-term residents in these two cities have increased at an annual average rate of 600,000, with media reports saying that more than half of the students in many Shanghai schools are children of migrants.

In contrast, low-paying jobs in manufacturing in third- and fourth-tier cities are not conducive to any increase in housing prices. Housing markets in these cities are not driven by their economic productivity but by capital flow.

The housing markets in these cities grew because of an expansionist fiscal policy. Capital investment, especially the central government's 4-trillion-yuan stimulus package in 2008, greatly inflated asset prices. Since many small and medium-sized enterprises faced difficulties during the global financial crisis, capital was injected into large, and in many cases inefficient, State-owned enterprises. Many projects were developed swiftly without proper feasibility studies, and capital flowed into the real estate sector because of market constraints. And the difficulty to get land in first-tier cities prompted many developers to shift to third- and fourth-tier cities. Despite that, the housing market in these cities is quite constrained.

The bifurcation between owner-occupied and rental housing markets means the investment in the former is mainly for asset appreciation. Rental yields are low, and the "buy-to-let" phenomenon is neither common nor the driver for housing development in China. The housing market has actually been driven by capital liquidity and monetary expansion; it is quite sensitive to the capital market. The development of the housing market in smaller cities was detached from demand, which led to houses lying vacant in some new districts or "ghost cities".

But a different possibility is being noticed in the capital market since June 2013. With the tapering of quantitative easing in the United States, capital began to flow out of emerging markets. Although the central bank has intervened to plug this flow from China, continuing the monetary expansion is now impossible. The introduction of Internet financial product, such as Alibaba's online fund Yu'ebao, attracted savings from banks and introduced some degree of market rate into the financial system, and banks became prudent because of the risks in the housing market. Thus began the deflation of the housing bubble.

The increase in rents reflects substantial demand for housing in first-tier cities where productivity is relatively high, as is the population. According to the NBS, housing prices in Shanghai increased 20.8 percent in the first month of this year compared with January 2013.The rent increase because most of the newcomers to Shanghai (and Beijing) cannot afford to buy a house and have to stay in rented homes.

The supply of rental housing, however, is faltering because demolition of houses in old areas and "urban villages" has reduced the number of affordable rented homes and homebuyers are more interested in asset appreciation than renting their property. The increase in rents, therefore, can be regarded as a market adjustment to low rental yields, although it has hurt the interests of the low-income groups.

Should the government emulate the examples of developed market economies to protect tenant rights? Given property owners' unwillingness to rent out their houses and the high vacancy rate of owned homes, the good intention may not help make housing affordable. So instead of speeding up demolition of houses and building large-scale housing units, often in inconvenient places, a more sensible approach would be to recognize the role of the informal housing market and regularize the rental procedure to protect tenants and landlords both. There is a possibility, though, that the housing market downturn may slow down housing demolition.

When the market recedes in developed economies, apartments in places difficult to access become the most vulnerable assets for investment, while mainstream detached houses in easily accessible areas keep their values. Hence, China's housing market may see bifurcation from now on. The question is: Is it possible to offer vacant houses on rent instead of building large-scale affordable housing, because homeowners under heavy debt can use the incomes from rents to ease some of their debt burden.

The author Fulong Wu is Bartlett Professor of Planning at University College London, and Yuemin Ning is director of the Centre for Modern Chinese City Studies, East China Normal University, Shanghai.