China's Rental Market Strategy: Uneven Impacts Across Income Groups

China's Recent Rental Strategy Support the Market Yet Creates Uneven Impacts

China's recent pivot toward bolstering its rental market as a strategic solution for struggling real estate sector impacts various segments of society differently. This move, influenced by policies stemming from the Third Plenum, may offer benefits to local authorities and affluent homeowners while presenting challenges for middle-income families, potentially stifling household sping and exacerbating economic disparities.

According to China's central bank’s latest monetary policy implementation report published on August 9th, 2024, rental income is being positioned as a crucial factor in determining housing value. The overall return rate expected from rental housing is projected to surpass 3, surpassing the returns of most alternative assets based on static rent-to-sale ratios.

This strategic shift signals the government's intention to support financially troubled developers and reduce unsold apartment inventories by encouraging local governments to purchase vacant units for conversion into affordable housing. However, the operation of affordable housing necessitates ongoing mntenance costs, which are typically shouldered by local governments. To mitigate these financial burdens, cities like Shenzhen have increased rent prices on government-subsidized housing by two-thirds, rsing the rental yield from 0.6 to 1.

For wealthy urban homeownersthose among the top 10.5 of urban dwellers with at least three apartmentsthe rising rents can help offset some of the losses incurred due to declining property values, potentially preserving their wealth in the face of real estate market downturns.

On the other hand, this strategy introduces significant challenges for middle- and low-income households. Currently, around 25 of China's urban populationor approximately 143 million peopleare renters, with many facing rent-to-income ratios above 20, reaching over 30 in major cities like Shangh where nearly 60 of renters experience a ratio exceeding 30. Among these households, about 26.7 have ratios between 41-50.

Uncertnty surrounding the property market and deflationary pressures within China's economy are leading many to consider rental living as a long-term solution rather than a temporary fix. As demand for rental properties increases and rents soar, so do financial burdens on tenants in major cities like Shangh.

Moreover, the substitution effect could prompt low-income households to seek smaller, less favorable housing options due to affordability concerns. This not only impacts their quality of life but also reinforces socioeconomic inequalities, potentially pushing those unable to afford property or rising rents into peripheral areas both geographically and economically.

While China's reforms create divergent outcomes across societyaddressing some of the concerns stemming from a deflating real estate sector while exacerbating income disparitiesthe government must implement measures that mitigate these challenges. This includes increasing household incomes for middle- and, especially, low-income groups to surpass rent increases.

Yuhan Zhang

Yuhan Zhang specializes in China's political economy as an economist based at UC Berkeley and has served as a consultant for US multinational corporations.

Carnegie does not take institutional positions on public policy issues; the views represented are those of the authors and do not necessarily reflect Carnegie’s views or opinions.

Citations to may be used, provided that proper attribution is given to Carnegie owment for International Peace.
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