In its latest Monetary Policy Implementation Report released on August 9, 2024, China’s central bank noted that “rent is an important variable influencing housing values… the overall rate of return on rental housing is expected to exceed 3 percent on a constant rent-to-sales basis, which is higher than most asset return rates.
This strategic shift, which emerged in the wake of the Third Plenum, signals a significant shift toward boosting the rental market as a way to support the shrinking real estate industry. While this strategy benefits local governments and wealthy homeowners, it has different implications for China’s middle- and low-income populations, including potentially dampening household consumption and exacerbating existing economic imbalances. (In this article, middle income refers to urban residents with a previous annual income per three-person household of 300,000 renminbi (about $41,667) in first-tier cities such as Beijing or Shanghai, or 200,000 renminbi (about $27,778 in Chengdu, Hangzhou, Chongqing, Wuhan, and Tianjin, or other major cities, refer to urban residents with annual incomes below 100,000 renminbi (about $13,889).
Beijing proposes supporting financially troubled property developers and reducing the inventory of unsold apartments by ordering local governments to buy vacant apartments and convert them into affordable housing. However, affordable housing requires ongoing maintenance, and rents for these properties are often set below market value. These expenses are borne by the government, especially at the local level. One way in which developers can afford to buy apartments is to buy them. One way local governments can reduce this financial pressure is to strategically promote higher rental prices. Shenzhen, for example, recently raised rents on some government-subsidized housing by two-thirds, raising the rental yield from 0.6 percent to 1.0 percent.
Wealthy urban landlords, especially the 10.5 percent of the urban population who own at least three apartments, stand to benefit from rising rents. As rental incomes rise, these individuals can offset some of the losses caused by falling housing prices, preserving some of their wealth even as the broader property market struggles.
Of course, rising rents do not guarantee capital appreciation for properties with wealthy landlords. Observational data between January 2011 and July 2024 indicate a strong correlation (0.87) between rental prices and housing prices, suggesting that rental prices do not directly cause housing prices to move. However, a Granger causality test suggests that an acceleration in rental prices can lead to an acceleration in housing prices three to four months later. In other words, if the rental market strengthens, wealthy landlords will get richer.
In contrast, the new strategy poses significant challenges for middle- and low-income families. Currently, about 25 percent of China’s urban population, or 143 million people, are renters. In some major urban centers, the rent-to-income ratio already exceeds 20 percent, and first-tier cities exceed 30 percent. For example, rental costs in Shanghai are particularly high: nearly 60 percent of renters have a rent-to-income ratio above 30 percent. Among these renters, 26.7 percent have a rent-to-income ratio of 41 to 50 percent. This significant rental burden leaves little room for other discretionary spending, putting significant pressure on household finances.
Uncertainty in the housing market, coupled with deflationary pressures in the Chinese economy, has led to renting being viewed as a long-term rather than a temporary fix. As rental demand increases, rents will rise further and exacerbate the financial pressure on renters, especially in large cities. The resulting cuts in discretionary spending could further dampen household consumption, posing additional challenges to an economy already struggling with weak consumer confidence and insufficient domestic demand.
In addition, the substitution effect may push low-income households into smaller, less desirable housing as they try to manage