China to build more public housing3 December, 2010, 1:13. Posted by Zarathustra
Tags: Hong Kong, Real Estate
I first thought about writing this as a sequel of the previous short article: Bet against the most powerful central banks, would you? But I then changed my mind.
The Ministry of Housing and Urban-Rural Development wants to increase public housing supply by 72.4%, which is ridiculously high growth rate. These are mainly rental housing for low-income families who cannot afford private housing. The investment for these housing projects will amount to 1 trillion Chinese Yuan in 2011.
In many ways, the Chinese government is increasingly taking lessons from the experience of Hong Kong. It is sometimes very hard to see all the connections why this is so, but the core of the problem is this: China has a huge property bubble, which makes ordinary people hard to afford housing in the private sector, but they do need places to live in. There are many reasons to explain the property bubble. To quickly recap, China has an out-of-control money supply growth, which has inevitably fuelled the real estate bubble and inflation. However, as local governments are hugely indebted, they need to finance their operations and investments by selling lands at good price, unconsciously replicating the so-called “high land price” policy in Hong Kong. So the central government is in a dilemma: it does not want real estate prices and inflation to go higher, but it is even more reluctant to make home prices collapse and engineer a recession to stop inflation.
During the time when Hong Kong was still under the British Crown, the British Hong Kong government saw the need of housing for lower income families as population increased and proper and affordable housing was scarce, creating social problems. In the wake of a massive fire in a slum settlement in Shek Kip Mei, the British Hong Kong government started the public housing programme, providing housing for low-income families for rental. Two decades or so later, the British Hong Kong government started another scheme called the Home Ownership Scheme (HOS). Instead of letting the flats, government sold the flats at below-market prices. The HOS was ended in 2003, but the public housing for rental is still on-going.
So as China provide low-cost housing, it is somehow learning from Hong Kong, consciously or unconsciously. The purpose of building low-cost housing for rents may not be to curb home prices. After all, low-cost housing for rents are typically built with poorer specifications than private sector housing, so they are arguably two separate segments of the real estate market. The aim might probably be easing social tension by providing affordable homes for low-income families. No matter what purpose they have in mind, however, increasing supply drastically will have implications for property prices. It will take time to build these apartments, and no one knows for sure where the real estate market will stand 2 years from now. If the real estate market collapse when these apartments completed, it will prove to be a fatal blow.