China’s affordable housing programme

Here are some questions and answers about China’s affordable housing programme.

WHAT IS BEIJING’S PLAN?

China aims to construct 36 million units of state-subsidised housing — also called affordable housing,public housing,or social housing — between 2011 and 2015.

The ambitious plan is due for a mid-term review next year.

We should adjust it if necessary,Jiang Weixin,Minister of Housing and Urban-Rural Development,told top lawmakers in a meeting on October 27.

China started building 16.3 million housing units and finished 11 million during the last five years. In 2010 alone,China started 5.9 million units and completed 3.3 million.

China is well on track to achieve its goal of 10 million new starts of affordable housing this year and will probably scale down the target of another 10 million next year.

WHY IS CHINA BUILDING SO MANY AFFORDABLE HOMES?

Chinese home prices have skyrocketed in the past decade,hitting a record high far beyond the reach of average families.

Concerned about rising social discontent,Beijing beefed up efforts to build modest homes to be rented or sold at low prices to low-income households in a bid to foster social harmony.

The homes will also accommodate fresh graduates and migrant workers,apart from poor urban dwellers.

Some industry experts say China should have begun this in early 1990s when it first liberalised the real estate market,allowing private construction,purchase and ownership of homes.

The real estate boom that followed has helped fuel a decade-long GDP growth spurt of 10 per cent per year on average. China has since imposed heavy restrictions on the number of homes each family can buy to curb speculation and ease housing inflation.

As new construction typically take 2.5 years or more to complete,some local governments also buy or rent unoccupied private homes.

Affordable homes are planned to account for about 20 per cent of China’s overall housing market by 2015. Thereafter,China will cease massive construction and subsidise in cash poor families that are not yet sheltered by the scheme.

WHY SHOULD INVESTORS CARE?

China’s real estate market drives 10 per cent of the country’s GDP growth and a quarter of its fixed investment.

However,private property investment is slowing after Beijing rolled out a slew of tightening measures for more than a year to deflate excessive home price rises.

The affordable housing programme is widely expected to support overall construction activity.

Wei Yao,an economist with Societe Generale in Hong Kong,said in a note on October 18 that public housing investment will contribute 1.3 per centage points to GDP growth in 2011 and 0.9 per centage points in 2012,including its impact on other sectors such as steel and cement.

HOW IS THE PLAN FINANCED?

The housing ministry estimated total investment of 1.3 trillion yuan ($205 billion) this year to build affordable homes and it will probably need more next year.

The central and local governments shared 400 billion yuan this year,and 90 per cent of the funds are ready,the housing minister said on October 27 at the meeting with lawmakers.

Companies and individuals needed to invest 500 billion yuan and the rest should be supported by banks and other private investors,the ministry said.

WHAT ARE THE ISSUES?

Analysts doubt the accuracy of the numbers even though the housing ministry says it has dispatched officials to each province to check construction,project by project.

Second,investors remain skeptical about the ability of debt-ridden local governments to contribute to the initiative as they receive only a small part of national government revenues,but need to finance a large part of the investment.

Private investors largely lack enthusiasm as such projects typically offer only single-digit profit margins compared with private housing investment returns of more than 30 per cent. It is not unusual for developers to lose money on affordable housing.

But Wang Bao’an,assistant finance minister,said: We think funds are secured by various channels and government policies.

The central government will continue to increase its investment,after pouring in 152.2 billion yuan from its coffers this year,compared to 7.2 billion yuan in 2007,said Wang,who also addressed the same October 27 meeting of lawmakers.

To attract private investors,China sometimes offers free land and tax exemptions.

Third,there is uproar against unfair distribution. Domestic media have widely reported cases of people living in affordable homes driving expensive cars and that,in some cities,subsidised units were sold largely to local officials.

China’s current legal framework has only lenient punishments for cheating on documentation. To combat this,new affordable homes cannot be re-sold within five years,the government stands first in line as a buyer,and 80-90 per cent of land value appreciation must be handed over to the state.