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In its latest monetary policy implementation report, published on August 9, 2024, China’s central bank noted that “rent is the core variable influencing housing value . . . The overall return rate on rental housing is expected to exceed 3 percent based on the static rent-to-sale ratio, which will be higher than the return rates of most assets.”
This strategic pivot, emerging in the wake of the Third Plenum, might signal a significant shift toward bolstering the rental market as a way to prop up a 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 suppressing household consumption and exacerbating existing economic imbalances. (In this article, middle income refers to urban residents with annual pretax income, per three-person household, of 300,000 renminbi—approximately $41,667—in first-tier cities like Beijing or Shanghai, or 200,000 renminbi—approximately $27,778—in new first-tier cities like Chengdu, Hangzhou, Chongqing, Wuhan, and Tianjin or in other major cities. Low income refers to urban residents with annual pretax income of less than 100,000 renminbi—approximately $13,889.)
Beijing proposes to support financially troubled real estate developers and reduce inventories of unsold apartments by directing local governments to buy empty apartments and convert them to affordable housing. Yet, affordable housing requires ongoing maintenance, and the rents for these properties are typically set below market value. Such costs are shouldered by the government, particularly at the local level. One of the ways local governments have alleviated this financial strain is by strategically promoting higher rental prices. Shenzhen, for example, recently increased some government-subsidized housing rents by two-thirds, elevating the rental yield from 0.6 percent to 1.0 percent.
Wealthy urban homeowners, especially the 10.5 percent of the urban population who possess at least three apartments, stand to benefit from rising rents. As rental incomes rise, these individuals can offset some of the losses incurred from declining housing prices—maintaining their wealth to some degree, even as the broader real estate market struggles.
Of course, rising rents alone do not guarantee capital appreciation of properties with wealthy owners. While observational data between January 2011 and July 2024 indicate a robust correlation (0.87) between rental prices and housing prices, that does not mean rental prices directly cause housing prices to move. However, a Granger causality test does suggest that an acceleration in rental prices is likely to lead to an acceleration in housing prices after three to four months. If the rental market strengthens, in other words, rich homeowners will very likely become more affluent.
Conversely, the new strategy poses significant challenges for middle- and low-income households. Currently, approximately 25 percent of China’s urban population, or 143 million people, are renters. In some major urban centers, rent-to-income ratios already exceed 20 percent, with first-tier cities surpassing 30 percent. For example, rental costs in Shanghai are particularly high, with nearly 60 percent of renters facing a rent-to-income ratio that exceeds 30 percent. Among these renters, 26.7 percent have a rent-to-income ratio of 41–50 percent. This substantial rent burden leaves little room for other discretionary spending, placing significant strains on household finances.
The uncertainty in the property market combined with deflationary pressures in China’s economy have led many to view renting as a longer-term solution rather than a temporary fix. As rental demand increases, rents are poised to rise further and exacerbate financial pressures on renters, particularly in major cities. The resulting reduction in discretionary spending could further dampen household consumption, posing additional challenges to an economy already struggling with weak consumer confidence and insufficient domestic demand.
Moreover, the substitution effect could push low-income households toward smaller, less desirable living spaces as they attempt to manage their housing costs. This downsizing not only affects their quality of life but also reinforces socioeconomic inequalities. Those unable to afford property or rising rents in desirable urban areas may be pushed to the periphery, both geographically and economically, further entrenching the divide between the wealthy and the less affluent.
As in many other areas of economic reforms, housing reforms create conflicting outcomes. While policies proposed by the People’s Bank of China and other policy institutions to raise rents and enhance rental yields may address one set of concerns arising from the deflation of China’s housing sector, they also run the risk of worsening the 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 needs to implement or deepen reforms that directly or indirectly reverse these transfers. Above all, household incomes for middle- and especially low-income groups must outpace rent increases.
