In its latest monetary policy implementation report on August 9, 2024, the People’s Bank of China noted that “rent is the most important variable affecting real estate value… The total return on rental housing is expected to exceed 3 percent based on the static rent-to-sale ratio, higher than the return on most assets.”
This strategic shift emerging from the Third Plenum could be a significant shift toward strengthening the rental market as a means of supporting the shrinking real estate industry. While this strategy benefits local governments and wealthy homeowners, it has other implications for China’s middle- and low-income populations, including potentially curbing private consumption and exacerbating existing economic imbalances. (In this article, “middle income” refers to urban residents with an annual gross income per three-person household of 300,000 renminbi—about US$41,667—in first-tier cities such as Beijing or Shanghai, or 200,000 renminbi—about US$27,778—in new first-tier cities such as Chengdu, Hangzhou, Chongqing, Wuhan and Tianjin, or in other major cities. “Low income” refers to urban residents with an annual gross income of less than 100,000 renminbi—about US$13,889.)
Beijing proposes to support financially strapped real estate developers and reduce the stock of unsold housing by instructing local governments to buy up vacant apartments and convert them into affordable housing. However, affordable housing requires ongoing maintenance and rents for these properties are typically below market value. These costs are borne by the state, especially at the local level. One way local governments are easing this financial burden is by strategically promoting higher rental prices. Shenzhen, for example, recently increased rents for state-subsidized housing by two-thirds, increasing rental yields from 0.6 percent to 1.0 percent.
Wealthy urban homeowners, particularly the 10.5 percent of the city’s population who own at least three apartments, are likely to benefit from rising rents. With rising rental income, these individuals can offset some of the losses they incur from falling property prices – and thus maintain their wealth to some extent even if the overall housing market weakens.
Of course, rising rents alone do not guarantee an increase in the value of properties with wealthy owners. While observational data between January 2011 and July 2024 indicate a robust correlation (0.87) between rental prices and house prices, this does not mean that rental prices directly lead to a movement in house prices. However, a Granger causality test suggests that an increase in rental prices is likely to lead to an increase in house prices after three to four months. In other words, as the rental market recovers, rich homeowners are most likely to become wealthier.
Conversely, the new strategy poses significant challenges for middle- and low-income households. Currently, around 25 percent of China’s urban population, or 143 million people, are renters. In some large urban areas, the rent-to-income ratio is already over 20 percent, and in first-tier cities it is even over 30 percent. In Shanghai, for example, rental costs are particularly high: almost 60 percent of renters have a rent-to-income ratio of over 30 percent. Of these renters, 26.7 percent have a rent-to-income ratio between 41 and 50 percent. This significant rent burden leaves little room for other discretionary spending and places a significant strain on household finances.
Uncertainty in the property market, coupled with deflationary pressures in China’s economy, has led many to view renting as a long-term solution rather than a temporary fix. As demand for rental housing increases, rents are expected to continue to rise, exacerbating financial pressures on renters, particularly in major cities. The resulting reduction in discretionary spending could further dampen private consumption and pose additional challenges to an economy already struggling with weak consumer confidence and insufficient domestic demand.
In addition, the substitution effect could push low-income households to move into smaller, less attractive housing spaces as they try to cover their housing costs. This downsizing not only affects their quality of life, but also reinforces socioeconomic inequalities. Those who cannot afford property or rising rents in attractive urban areas could be marginalized both geographically and economically, further widening the gap between the wealthy and the less well-off.
As in many other areas of economic reform, housing reforms produce contradictory results. While the policies proposed by the People’s Bank of China and other policy institutions to increase rents and improve rental yields can solve a number of problems arising from the deflation of China’s housing sector, they also risk exacerbating income imbalances at the heart of the Chinese economy. To mitigate the challenges posed by rising rents, particularly for middle- and low-income residents, Beijing must implement or deepen reforms that directly or indirectly reverse these transfers. Most importantly, household incomes of middle- and especially lower-income groups must rise faster than rent increases.
