“What is the purpose of the purchase?” China’s real estate problems are driving young people to rent

A few months after her wedding this year, Lillian Li moved from the southwestern Chinese city of Chongqing into an apartment near Beijing’s financial district.

But while Chinese newlyweds see property ownership as an essential next step after marriage, Li and her husband rent a two-bedroom apartment in the capital for 13,000 renminbi ($1,821) a month.

To purchase a similar apartment, Li and her family would need more than RMB 5 million just for the down payment – the equivalent of more than 30 years’ rent.

“My husband and I had a deep conversation about the life we ​​want,” said Lee, 28, “and came to a no-buy agreement. We don’t want to owe our parents a huge down payment or get into too much debt.”

Increasing numbers of young Chinese, who are major buyers of urban homes, are making the same decision—with potentially far-reaching repercussions for the nation. Turbulent real estate market.

Affordability is a thorny issue for homebuyers China, as median home prices have nearly doubled over the past decade. Rents have also increased, but by a much smaller rate. The ratio of residential property purchase cost to monthly rent was above 600 in major cities in June 2022, according to calculations by real estate data firm Zhuge Zhaofang. In 2007, the percentage was 400 or less.

A percentage above about 200 is a warning sign of a potential real estate price bubble, according to a report by the Chinese Academy of Social Sciences, a state think tank.

In Beijing, the average apartment now costs around RMB69,000 per square metre, according to real estate data provider creprice.cn.

First time buyers usually rely on family support and debt to buy a place to live in the big cities. But the woes of real estate developers like Evergrande started lagged behind last year With the liquidity crisis engulfing the real estate sector, many buyers have been left with unfinished homes. This has led potential buyers like Li to question what for decades was seen as the best opportunity for family investment in China.

Chinese home sales by floor area in 100 cities fell about 20 percent year-on-year in October, according to a survey by China Index Academy, a real estate research firm. While sales did not decline as quickly in major metropolitan areas, pessimism across the market dampened confidence. Government data showed that while new homes are still very expensive, median prices in 70 cities fell 2.4 percent in October from a year ago, the seventh consecutive month of decline.

“With no effect on wealth creation, what’s the point of buying real estate like crazy? Why not just rent?” said Victoria Zhan, a young banker who has put off plans to buy an apartment in suburban Shanghai this year.

The research department of China International Capital Corporation predicted that the number of Chinese rents will increase by 200 million to 300 million by 2035.

The cooling enthusiasm for housing purchases comes as the government moves to provide more affordable rental housing to young people as part of President Xi Jinping’s “shared prosperity” campaign.

Authorities are pushing more government-subsidised rental homes onto the market and are beginning to roll them out facilitation policies for the sector Including low-interest loans for rental housing developers.

Qiqi Zhang, managing director in Shanghai at US private equity group Warburg Pincus, which first invested in rental real estate in China in 2013, said rising house prices in big cities still put “a lot of pressure” on young people.

Zhang said the government “really wants to promote rental housing to meet the housing needs of young people.”

In January, China’s Ministry of Housing announced a goal to build 6.5 million affordable housing units in 40 cities over the five years to 2025, enough to house 13 million young and new residents.

The government’s promotion of the rental housing market is increasingly intertwined with its support for developers who are struggling to complete residential construction projects.

Financial regulators last month called for increased state-led conversion of unfinished homes into rental housing, revealing more sophisticated financial ways to help banks and investors buy up unfinished projects.

In response, the city government of Kaifeng in central China’s Henan Province said it plans to buy more than 1,000 unfinished apartments next year from Evergrande and turn them into rental homes.

In the central city of Xi’an, seven banks including the China Development Bank and China Construction Bank have pledged RMB210 billion in credit lines to support rental housing projects.

CCB, the country’s second largest bank by assets, said it had separately set up a RMB30 billion rental housing fund to purchase unfinished residential construction projects in more than 20 cities. A banker familiar with the fund’s operations said some projects had been bought from developers at a 50 percent discount to the price originally set for the homes.

In a research note, analysts at Morgan Stanley said the state’s promotion of rents is in line with Xi’s 2015 call for housing to be “liveable, not speculative.” But, they wrote, “the process will take time, and for the time being will be a negative support for the housing market.”

She told me that renting instead of buying would save her and her husband money and thus help them maintain their quality of life.

“We can buy an apartment in Chongqing when we are old and ready for retirement,” she said. “Before that, I think we will continue to rent in Beijing.”

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