Low-income Housing Surge Will Ease Market Slump


The outlook for China's real estate market remains sluggish this year, after Premier Wen Jiabao presented the government's resolution on the issue at the National People's Congress in March. Current restrictions on house-buying will not be eased in the short term, the resolution said.

As increased controls have been put in place, investment in commercial property has decreased visibly. Relevant industries such as steel, cement, home appliances and automobiles also slowed in the first two months of 2012. Likewise, in the last two months the growth of construction of new residential areas is at its lowest rate since 2009.

In terms of the effects of this downturn, there are two main questions: As a key part of fixed asset investment, will the current slump in the real estate market hold back development in other key sectors? And, more importantly, will the large scale construction of low-income housing started since last year would compensate for the reduction of private investment in the market?

For the first question, the answer seems quite clear. The growth in fixed asset investment in January and February is above market expectations, up 21 percent from the same period last year. Contrary to the investments on property and railway infrastructure, other components of fixed asset investment have maintained a rapid growth. This has ensured a 20-plus percent growth rate for the sector.

As for the second question, it's quite complicated. Statistics from Ministry of Housing and Urban-Rural Development show that 4.3 million units of low-income housing had been basically built in 2011. This figure reached almost 30 percent of the total residential housing supplies in 2011. According to the government's plan, this year another 7 million units of low-income housing will be constructed. Adding with 5.7 million units started in 2011, there will be about 13 million units built in 2012, which accounts about one-third of all residential property being constructed.

To ensure the completion of low-income housing construction projects, the Chinese government has allocated 402.4 billion yuan (US$63.8 billion) for low-income housing in this year's fiscal budget, a 15.2 percent increase from last year. Commercial banks will inject large scale capital into the construction, under the guidance of relevant policies. Additionally, most of the 250 billion yuan (US$39.6 billion) in local treasury bonds will be spent on low-income housing construction. According to figures of the first two months, local government revenues grew 13.1 percent over the same period of last year. This indicates more financial support from the local governments.

The construction of low-income housing will be more widespread after fiscal expenditures have been implemented. Usually, an upsurge of construction appears in the second and third quarters. After this occurs, we will have a basic estimation on the status of the low-income housing construction this year and how it will influence the economy.

If 5 million housing units can be completed within this year, it will be a milestone for the property market. According to previous data, the annual completed commercial housing is about 7 to 8 million units. That means though the completion of commercial ones drop by 15 percent in 2012, the total supply of residential housing will still surpass 10 million, demonstrating a 20-30 percent year-on-year increase. If the average area of a low-income housing unit is at about 50-60 square meters, the total supplied area of low-income housing will be 250-300 million square meters. Even though the commercial area constructed decreased by 15 percent, the total area constructed can still rise by 10 percent.

This large amount of new construction on low income housing projects will influence the structure of Chinese property market. Meanwhile, such a construction scale shows that China's need for commodities is still very high. Thus, the demand slump which has been worrying some suppliers will not appear.

With regard to the price, the room for growth is getting smaller. The commercial housing storage grew by 60 percent and reached 169 million square meters by the end of 2011. In the next three years, there will be 28 million people migrating from rural areas to cities. The supply of low-income housing and commercial housing together will be 12 -14 million units. If a unit accommodates two people, we estimate that the supply and demand in the Chinese property market will be balanced on the whole by 2015. Purchasing restrictions may be end in future, which would further stimulate demand. But the implementation of property taxes will increase the cost of owning property.



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