China's Ineffective Affordable Housing Policy

Central Bank and State-Owned Banks' Policies

Let's discuss China's affordable housing policies. According to the People's Bank of China (one of the four central state-owned banks), a new affordable housing refinancing program has been launched to support the acquisition of existing commercial properties for conversion into affordable housing, utilizing the country's existing housing assets.

Low-Cost Funds to Reduce Financing Costs

The central bank provides banks with low-cost funds at 1.75% to further reduce financing costs in the rental market.

This Policy allows local banks to decide whether to participate in the acquisition. Real estate companies and selected local state-owned enterprises negotiate equally on acquisition prices and other terms, with no forced transactions.

Local governments and capable, efficient state-owned enterprises focus on reducing inventory by purchasing completed housing stock and converting it into affordable rental or sale housing.

Benefits of Revitalizing Existing Assets

This approach revitalizes existing assets, reduces inventory, and supports the government's public rental housing supply. It avoids high costs and long return periods associated with the government's heavy asset acquisition, management, and renovation models.

Before this, the government had already trialed the acquisition of existing commercial housing for affordable housing in select cities.

Central Bank's 100 Billion Yuan Rental Housing Loan Support Plan

Early in 2023, the central bank established a 100 billion yuan rental housing loan support plan, supporting pilot acquisitions in towns like Jinan and Zhengzhou to expand the rental housing supply.

This new affordable housing refinancing policy integrates the 100 billion yuan rental housing loan support plan into a comprehensive national strategy, effectively mobilizing 300 billion yuan. However, it has only used one-third so far.

However, there are concerns about whether market-based acquisitions, rent yields, and financing costs will affect the enthusiasm of state-owned enterprises (SOEs) to participate.

The main issue is that the rental income minus the operating costs must cover the financing costs for the funds borrowed by state-owned banks.

If the rental income minus the operating expenses is less than the monthly interest payment, the housing project will only incur increasing financial losses.

This scenario is contradictory because if a property has rental income requirements, it must be selective about its location. You must not rent a remote property; it requires a good location and surrounding infrastructure. Banks will not acquire poorly located properties that are likely to incur losses.

Limited Properties Meeting Profitability Criteria

Therefore, properties that meet banks' profitability or break-even requirements are likely to be very limited.

The report also mentions that cities with high net population inflows, significant new residents, and substantial youth populations, such as first-tier and second-tier solid cities like Chengdu, Hangzhou, and Wuhan, have relatively resilient rental housing demand.

However, this is inaccurate as these cities' rental properties often do not command high rents, heavily influenced by location.

An insider close to regulators noted that local governments and SOEs bulk-buying existing housing for affordable housing reduces developers' sales costs, improves the rent-to-sales ratio for long-term rental enterprises, and is seen as a more favorable alternative to bankruptcy liquidation.

Struggling developers are more willing to sell at a discount to local governments and SOEs, possibly lowering acquisition costs further and reducing operating costs.

Preference for Direct Consumer Sales

This explanation needs to be revised because if financially troubled developers are willing to sell to local governments and SOEs at a discount, they would logically prefer to sell directly to consumers at a discount.

Government's Intentions and Market Monopoly Concerns

The logical errors in China's affordable housing policies indicate that the government does not aim to make housing more affordable for consumers. While the government's intentions remain unclear, monopolizing the housing market could be a step toward reverting to a planned economy. We will continue to monitor developments in this area.