The new round of housing reform has a great impact

Author: Xingchen

Source: Zhenghe Island (ID: zhenghedao)

The real estate industry in the past two years has been turbulent.

Large real estate companies have thunderstormed one after another, especially Evergrande's debt of more than 2 trillion yuan, Xu Jiayin was suspected of violating the law and committing crimes, and was taken compulsory measures in accordance with the law. Evergrande's endgame heralds the end of the era of reckless expansion of real estate.

At the macro level, Q3 economic data further confirmed the downturn in the property market.

In the first nine months, the national real estate development investment was 8,726.9 billion yuan, a cumulative year-on-year decrease of 9.1%. The area of new housing starts in China has returned to the level of 2006, and the amount of commercial housing sales has returned to the level of six years ago.

Should we save real estate? Where will real estate eventually go? These have become hot topics of concern.

01 The final word, the new house has been changed

Some time ago, the abbreviated version of the new housing reform, known as the "No. 14 document", was born, which sparked heated discussions.

According to the Economic Observer, the "Guiding Opinions on the Planning and Construction of Affordable Housing" document (Guo Fa [2023] No. 14, hereinafter referred to as "No. 14 Document"), which was deliberated and adopted by the executive meeting of the State Council on August 25, has recently been conveyed to the people's governments of various cities and institutions directly under various ministries and commissions.

Tianjin, Zhengzhou, Henan Province and other places have begun to arrange relevant work.

This document was issued in the name of the State Council, and the specifications are very high, in which the status of affordable housing has been unprecedentedly improved, and the positioning relationship with the market is clear, and it has been called the "new housing reform plan" by officials in many places.

Circular 14 sets out two major objectives:

The first is to increase the construction and supply of affordable housing, "so that the wage and salary groups can gradually realize home ownership, eliminate the anxiety of not being able to afford commercial housing, and let go of their hands and feet to strive for a better life";

The biggest feature of the placement type of affordable housing is the supply at cost price and the closed circulation.

"Document No. 14" makes it clear that the government will allocate land for affordable housing and develop it at a low profit. "The placing price shall be calculated and determined according to the principle of basically covering the cost of allocating land and the cost of construction and installation, plus a moderate and reasonable profit." At the same time, affordable housing shall not be listed and traded, but can only be circulated in the system, and shall not be idle for a long time after purchase.

It can be seen that the main purpose of the "new housing reform" is to meet the housing needs of low-income people.

The biggest difficulty in building affordable housing is the source of land. In addition to government allocation, revitalizing the stock of land is another way.

Circular No. 14 proposes that "cities with a large inventory of commercial housing may renovate or purchase existing commercial housing for use as affordable housing, revitalize idle land and houses, and avoid waste caused by duplicate construction." ”

Some scholars have called on the government to purchase commercial housing as affordable housing at low prices.

The second is to promote the establishment of a new model for the transformation and development of the real estate industry, so that commercial housing can return to its commodity attributes, meet the demand for improved housing, promote stable land prices, stable housing prices, and stable expectations, and promote the transformation and high-quality development of the real estate industry.

It is worth noting that "let commercial housing return to commodity attributes".

In the past, it was stated that the commercial housing should return to the "residential attribute", and the return of the commercial housing to the "commodity attribute" means that the commercial housing market will be dominated by the allocation of market resources, and the market will play a decisive role in the allocation of resources.

After the issuance of the document, a number of hot cities have announced that they will abolish land price restrictions and restore the principle of "the highest price wins". Chengdu and Xiamen have also lifted the sales price limit, and developers can set prices freely after building houses.

The implementation of relevant supporting policies indicates that commercial housing is returning to commodity attributes.

In short, Circular 14 heralds that the single-track system dominated by commercial housing has become a thing of the past, and has been replaced by a dual-track system of affordable housing and commercial housing. The two systems are independent of each other and do not circulate with each other.

At the central financial meeting at the end of October, it was also emphasized to build a new model of real estate development.

The dual-track model has sparked a huge discussion in all walks of life - China should move from the Hong Kong model to the Singapore model?

The focus of public attention is on the proportion of affordable housing, which determines the future of China's real estate.

At present, the proportion of affordable housing in the market is not high, and commercial housing has been dominant for a long time.

Huatai Securities estimates that from the perspective of the existing volume, the stock of affordable housing is dominated by public rental housing and affordable housing/two-limit housing (price-limited commercial housing), contributing 3% and 5% of the country's housing supply.

Singapore is a typical "home ownership", 80% of which is affordable housing, and the remaining 20% is commercial housing. Even in Hong Kong, the proportion of affordable housing exceeds 4%.

As early as 2018, Zhang Xuefan, Secretary of the Party Leadership Group and Director of the Shenzhen Municipal Housing and Construction Bureau, announced that Shenzhen would take Singapore as an example, and its future plan was that 40% of the new housing supply structure would be commercial housing and 60% would be affordable housing (including public rental housing, affordable rental housing, and co-ownership housing).

Huang Qifan, former deputy secretary of the Chongqing Municipal CPC Committee, believes that in the future, at least 30 percent of urban residents should be allowed to live in affordable housing, public rental housing, or talent housing, so that relatively low-income groups, who have just worked, and who have settled down in rural areas to work in cities can live in affordable housing, while the expenditure and rent of affordable housing only account for about one-sixth of the annual income of households.

In this regard, in the future of China's real estate, affordable housing will become the mainstream.

Real estate is undergoing in-depth structural adjustment, and real estate policies have been introduced since the beginning of this year, which also indicates that the reform of the housing system has entered a period of force from the exploratory period.

02 Why "housing reform"?

Looking back on the 45 years of reform and opening up, the marketization of China's commercial housing has been quite mature, and real estate has become a pillar industry.

This is not the first housing reform in China.

In China's real estate construction, there are three key nodes in the real sense of "housing reform".

In the early days of the founding of the People's Republic of China, that is, in 1949, mainland cities have been implementing the system of welfare housing, and units are allocated to workers at low rents. However, under the planned economic system, the problem of housing difficulties has become prominent, resulting in the whole people living in snails.

In 1978, Deng Xiaoping first proposed the concept of "housing reform", making it clear that "urban residents can buy or build their own houses." Not only new houses can be sold, but old houses can also be sold, and they can be paid in one lump sum or in installments, and paid off in 10 or 15 years. ”

As a pioneer city of reform and opening up, Shenzhen can be said to be the source of China's real estate marketization, and at a time when it was poor and white, Shenzhen learned from the Hong Kong model and obtained the funds needed for economic construction through public auctions of the use rights of state-owned land.

This practice is being replicated throughout the country.

In 1998, the Asian economy was devastated by the financial turmoil and crisis. At this time, China's reform and opening up had been going on for 20 years, and the economy had slowed down significantly.

In order to stimulate domestic demand, China has joined the WTO and launched the famous 98 housing reform internally.

On July 3 of the same year, the State Council issued the Notice on Further Deepening the Reform of the Urban Housing System and Accelerating Housing Construction, which abolished the welfare housing system and implemented housing commercialization, which opened more than 20 years of China's real estate development.

The most representative is the "Wenzhou Speculation Group", when the most exaggerated time, 157 Wenzhou people drove into Shanghai and bought more than 100 houses in 3 days.

In 2003, the State Council issued the Notice on Promoting the Sustainable and Healthy Development of the Real Estate Market, officially clarifying that the real estate industry is a pillar industry of the national economy.

Real estate has become one of the locomotives of economic development in the mainland.

After more than 20 years of rapid development, the mainland's real estate market has finally reached its "peak", both in terms of per capita living area and home ownership rate, which have reached the world's highest level.

Not long ago, the Ministry of Housing and Urban-Rural Development announced at a press conference that the total number of existing houses in the mainland has exceeded 600 million. Although this data is not all residential, related topics are still on the hot search.

Another set of data comes from the National Bureau of Statistics, according to the National Bureau of Statistics, China's per capita urban housing area in 2020 was as high as 40 square meters, which is already a surpass developed country. According to the central bank's report, the homeownership rate of urban households is 96%, and the average household owns 1.5 houses, which is also the highest level in the world.

In 2023, the latest judgment of the Politburo meeting of the Central Committee on the real estate market, "the relationship between supply and demand in the real estate market has undergone major changes".

The real estate market has bid farewell to the shortage phase and officially entered the surplus stage. A new round of housing reform is imminent, and the fundamental reason is the "mismatch between supply and demand" in the real estate market.

On the demand side, the mainland's demographic structure has undergone profound changes, with the slowdown in population growth and the change in young people's perception of buying a house, resulting in weaker demand in the real estate market.

In 2022, the country's population will be 141175 million, a decrease of 850,000 from the end of the previous year, which is the first time since the founding of the People's Republic of China that there has been a negative population growth.

When the author communicated with Teng Tai, president of Wanbo New Economic Research Institute, he once said that the real estate industry has an overall surplus, which is related to the "421" (four old people, a couple, and a child) family structure, and the next generation will have less and less demand for housing in the future.

Another reason for housing reform is housing prices, and land prices are the main reason for pushing up housing prices.

During the 30 years from 1949 to 1979, China's fiscal system generally implemented a system of "unified revenue and expenditure."

But in 1993, the central government's tight financial situation reached its peak. According to data from China's Ministry of Finance, the proportion of central government revenue in state revenue and the proportion of state revenue in GDP fell from 39.68 percent and 22.79 percent in 1985 to 22 percent and 12.6 percent respectively in 1993. Reform is imminent.

Every reform of tax collection and management is a game of financial power between the central and local governments. In July of the same year, at the National Finance Conference, Zhu Rongji, then vice premier of the State Council, first proposed the idea of reforming the tax-sharing system.

The tax-sharing system has affected local financial power, and the resistance to reform is self-evident. Within two months, Zhu Rongji and his entourage visited 13 provinces, municipalities, and autonomous regions to conduct negotiations, and the process was extremely arduous.

In 1994, the State Council decided to set up provincial and sub-provincial tax bureaus into national taxation bureaus and local taxation bureaus. In the historical context at that time, the reform of the tax-sharing system was necessary, but it also laid hidden dangers for the later economy.

In the reform of the tax-sharing system, local finances have lost their tax sources, and the main means of increasing revenue is to sell land, and even some localities have raised land prices in the name of urban construction, resulting in high land prices, and local finances have a strong dependence on land, which has also become a stubborn disease plaguing China's economy.

In the real estate sector, real estate companies are obsessed with the "high leverage, high debt, and high turnover" model, blindly engaging in scale expansion; some market players speculate in real estate, and banks and social funds pour into the real estate market in large quantities. Housing prices will not fall has become a delusion for many people.

The excessively high house-price-to-income ratio has changed young people's concept of buying a house.

The house-price-to-income ratio refers to the ratio of housing prices to the annual household income of urban residents. For example, if a house is worth 1 million yuan and the annual income of a family is 200,000 yuan, the house-price-to-income ratio is 5 times.

As one of the main drafters of the national housing reform plan, Gu Yunchang once talked about the formulation process of the housing reform in 98, and the house-price-to-income ratio was one of the focuses of discussion.

At that time, the discussion group considered the most reasonable house-price-to-income ratio to be between 4-6 times.

In the end, Yu Zhengsheng, then Minister of Construction, made a decision to calculate the house price to income ratio of 4 times, and give buyers more preferential subsidies as much as possible to mobilize everyone's enthusiasm for buying a house.

In just over 20 years, China's house-price-to-income ratio is the highest in the world.

In 2022, Shenzhen and Shanghai ranked first and second with a house price-to-income ratio of 36.5 and 35.2 respectively.

The introduction of a two-track system is not the first attempt.

In the 98 reform, "establish and improve a multi-level urban housing supply system with affordable housing as the mainstay".

Contrary to expectations, compared with the increasingly mature housing market, there is a shortage of affordable housing, and in the process of implementation, there are many shortcomings.

According to Gu Yunchang's later recollections, in the 98 reform, what was unexpected was that the repeatedly entangled problems such as house purchase subsidies were quickly solved by various places. On the contrary, policies such as the reform of the supply system and the construction of affordable housing have encountered problems in their implementation, "Now it seems that although we have built a lot of affordable housing, the accuracy is not enough, and there are rent-seeking behaviors and violations in it."

Another reason is that local governments are reluctant to come up with good land plots and invest a lot of money, which also leads to the inefficient supply of affordable housing.

03 The next 10 years will have a great impact

Every housing reform affects everyone.

Since the second half of 2023, although the real estate sector has intensively issued a number of easing policies, and the real estate regulation in a single month in September has even exceeded 170 times, the market has reflected lower than expected, and the rhetoric of singing about the decline of real estate has been rampant.

The implementation of the new model of real estate development will undoubtedly change the pattern of real estate in the future.

So, is there still a chance for China's real estate? Combing through the analysis of relevant policies and industry insiders, real estate will usher in five changes.

1. Meet the gradient consumption of residents and reconstruct the category system of China's housing

Real estate has the dual attributes of consumption and finance.

The dual-track model will return affordable housing to residential attributes to meet the demand for rigid housing; commercial housing will return to commodity attributes and focus on meeting the demand for improved housing, and the real estate market will usher in a new pattern of "low-end security and high-end market", and the product logic of real estate enterprises will be adjusted.

In the past, the real estate business model was scale, cost, and speed, and the house was like a fast-moving consumer product, but now the savage growth of the incremental market has become a thing of the past, and the operation of stock assets is in its infancy, and real estate companies pay more attention to service and product power.

In the residential sector, blue-collar apartments, senior apartments and other subdivisions, and Japan's Toyota houses, Panasonic houses and other intelligent houses will also usher in new opportunities. In addition to residential, new property needs such as logistics and warehousing, medical and health care have begun to become the focus of everyone's investment.

2. Central enterprises and state-owned enterprises carry the banner

The total demand for affordable housing is increasing.

During the "14th Five-Year Plan" period, the country plans to build and raise nearly 9 million units (rooms) of affordable rental housing (rental housing), which is expected to solve the housing difficulties of more than 26 million new citizens and young people.

The Ministry of Housing and Urban-Rural Development has also proposed that key cities should increase the proportion of rental housing land in new residential land to more than 30%.

Since affordable housing is a low-profit development under the leadership of local governments, central and state-owned enterprises will return to the track of affordable housing and carry the banner of construction, and individual private enterprises will also undertake a small number of government construction projects.

Some experts predict that there are more than 70,000 residential real estate companies in the mainland, and only 6-7,000 are expected to be left in this field in the future, and they are concentrated in places where the economy, population, and employment continue to grow.

According to the forecast of Zhigang Think Tank, 60%-70% of central and local state-owned enterprises dominate rental housing and co-ownership housing, 30%-40% of private and listed enterprises dominate high-quality market-oriented housing, and 3%-5% of professional real estate enterprises dominate health care and cultural real estate.

Source: Zhigang Think Tank

3. Fluctuations in house prices

There are differences in the customer base of affordable housing and commercial housing.

Affordable housing is mainly aimed at the housing problems of low-income families, while commercial housing meets the needs of improved housing for middle-aged and high-end people.

Different customer groups show that affordable housing and commercial housing are mutually combinatorial, rather than competitive.

Many people in the industry believe that the increase in the proportion of affordable housing in the total number of housing will have a greater impact on the rigid demand and first-time home buyers in the short term, and the commercial housing projects in the suburbs or far suburbs will be impacted.

But in the long run, house prices will stabilize. Huang Qifan predicts that any price rise and fall will always be inseparable from external factors such as supply and demand, monetary phenomena, exchange rates and international purchasing power, and that in the next few decades, housing prices will not rise or fall sharply, and the average growth rate of housing prices will be lower than or equal to the growth rate of GDP.

4. Construct a spatial system of housing in China based on urbanization

Over the past 20 years, the rapid growth of housing demand in mainland China has been mainly supported by rapid urbanization.

The urbanization rate has grown from 30% in the 90s to more than 65% today, and as urbanization enters the second half, aggregate demand has shrunk overall, but it does not mean that there are no opportunities.

There is still room for growth in China's urbanization. According to industry discussions, China's urbanization level will reach between 75% and 80% from 2035 to 2050, and according to this estimate, about 150 million to 200 million people will move to cities in the future.

The direction of the development of new urbanization has changed to "people-centered". In the past, in the process of urbanization in the mainland, cities were at the core of economic development, and the city-building movement led to soaring land and housing prices, and young people could not enter and stay, resulting in "ghost towns" and "empty cities".

The new round of profound adjustment of real estate, compared with the transformation of urban villages, has ushered in new opportunities for cities with good infrastructure, relatively high governance level, population inflow and relatively healthy industrial development.

5. Shifts in the regulatory model of real estate

For a long time, real estate has been deeply tied to financial institutions, contributing a large part of the bank's profits. At the same time, the real estate sector also amplifies financial risks.

Since the beginning of 2021, a number of real estate companies have had debt problems, and the regulator's handling methods have shown the public that there are no big and unfailing enterprises in China.

In order to resolve financial risks, the Central Financial Conference at the end of October was the highest financial meeting in China, and there were many new changes:

For the first time, the new supervision model of real estate - the coexistence of subject supervision and capital supervision to ensure the closed operation of project funds, avoid misappropriation for other purposes, and ensure the smooth progress of the delivery of the building.

In order to alleviate the financing pressure of private real estate enterprises, for the first time, it was proposed to "treat all people equally and meet the reasonable financing of real estate enterprises with different ownerships".

It is worth mentioning that the meeting determined the three major directions of financial support for real estate, and proposed to speed up the construction of "three major projects" such as affordable housing and build a new model of real estate development.

With the transformation of financial supervision, the three-high model of "high leverage, high debt, and high turnover" of real estate enterprises will be unsustainable, and the policy is also like a traction rope, guiding many private enterprises to devote themselves to it.

04 Conclusion

In the 45 years of reform and opening up, China has grown from a poor economy to the world's second largest economy.

Real estate has become the backbone of China's economy. In the first half of 2023, real estate-related industries (including construction, finance, manufacturing, etc.) will play a 23.4% role in driving GDP.

However, in the past 20 years of rapid development of real estate, a large amount of capital has frantically poured into the real estate industry, which has squeezed the real economy.

No country in the world is strong because of the real estate industry.

Li Yining once said in the article "The New Opening Up of the Financial Sector Requires Courage and Patience" that the practice of world economic development shows that the real economy is the cornerstone of the national economy. Whether it is the debt crisis in Latin American countries, the Asian financial crisis in 1997, or the international financial crisis in 2008, there is a common reason, that is, the financial development and innovation of countries or regions are seriously detached from the real economy, resulting in excessive self-service and self-circulation of the financial industry.

The competition between countries has never relied on real estate, but on the real economy.

References:[1]. China will push for a new round of "housing reform", The Economic Observer

[2]. Research on the Reform of Urban Housing System in Mainland China, Economic Science Press

[3]. Analysis and Reflection, Shanghai People's Publishing House

[4]. 20 Years of Housing Reform in China: Exploration and Lessons

[5]. Bidding farewell to the era of hurricane, where is real estate going?

[6]. 70 Years of New China's Economy, Housing System Reform|Gu Yunchang: The Formulation Process of the "98 Housing Reform Plan" I Experienced, China Economic Weekly[7]. Dialogue with Huang Lichong: Under the new round of housing reform, affordable housing will exceed commercial housing, and the financial attributes and wealth appreciation effect of housing will be reduced.

8]. "The poor buy affordable housing, the rich roll up commercial housing", what will the new round of "housing reform" change?, Focus Finance & Sohu Real Estate

[9]. Feng Lun: China's real estate has entered the post-development era, changing cognition, and Feng Lun is a hero

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