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I am delighted to host another student guest post by Cyrus Anderson. This is the 4th student guest post of this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.

The People’s Republic of China should defuse the property bubble by addressing the underlying issues and taking a larger role in implementing affordable housing.

Yifan Xie writes of the woes of China’s property market in a recent Wall Street Journal article, describing the plight of RiseSun and in particular an apartment complex in Bengbu it owns. The complex is described as a ‘Toscana-style high-end community’, but there are no buyers in what is normally the season for property sales and RiseSun’s financial outlook appears risky. This downturn is not isolated to smaller cities; the cities in Fujian have not kept up the pace either. Properties sales there fell 16.3 percent in the first two months from a year earlier, according to an article in South China Morning Post.

This goes to show an excess in housing. But, this is only in higher-end housing. There are many people that would want to buy a home, but cannot afford to do so. It is not entirely the private sector’s fault. There are land shortages in many urban areas and redevelopment projects are difficult due to fragmented ownership, according to an article by Haotian Lin. But there are still problems with what property developers have done so far. Haotian Lin continues, “many of these housing projects are located at the urban fringe where infrastructure still needs to be improved and where there are not many job opportunities. This means high costs on commuting, which can make the housing ‘unaffordable’”. Quality of the residences has also been a problem. Local governments pushed developers to build the quantities stipulated by the central government, but have not ensured quality.

In order to effectively implement affordable housing, the central government will have to redesign the incentive structures and possibly take a larger role in carrying out the process. It can do more to build affordable housing in areas from which potential workplaces and other needs are accessible. To address the shortage of well located land, it could offer fairer channels for land conversion such as the successful land leasing in Shenzhen. Policymakers should also revamp the incentives the development of affordable housing, in order to help offset the high cost of land in accessible locations. This could include holding the developers and the local government officials in charge accountable for meeting some set quality standards. The other side to this is to also make it easier for consumers to buy the homes. Expanding access to housing finance is one idea, but it is not new. Some cities and provinces are taking steps in this direction. In Fujian the downpayment required for first-time buyers was lowered to 20 percent from 30 percent,  just after Jinan and Guangzhou lowered theirs. Another step would be to extend financing to migrant workers, many of who may face barriers such as the hukou permit.

According to a McKinsey report, “China’s affordable housing gap (the difference between market-rate housing costs and 30 percent of income for households in lower-income groups) equates to about $180 billion per year, or about 2 percent of GDP”. Integrating these groups will take significant effort, but in the long run, will result in a higher quality of life and a stronger economy. In the meantime, the property market could stand to benefit from this endeavor.