Wages in China make up more or less the same share of the national economic pie as in the US, but overall Chinese incomes are proportionately still much smaller. It is a little known fact that the main difference lies in how much households earn on their assets. A strategic shift in China’s approach to housing may be about to address this problem.

The new strategy can be summarised as “to rent is good, to hoard is bad”. Xi Jinping has repeatedly said that houses are not speculative assets but places to live. He wants to make productive use of properties that now sit unoccupied because owners look to capital gains, not rental income, for the return on their investment.

Reliable recent data on vacant investment properties are hard to come by. According to the Survey and Research Center for China Household Finance, the vacancy rate of sold residential homes in urban areas was 22% in Tier 1 cities, 24% in Tier 2 and 26% in Tier 3 in 2015. However, one can get a sense of how many more empty investment properties were added to the total in 2016-2017 by comparing property purchases with sales of home appliances such as washing machines and refrigerators. 

Unlike most countries, properties in China tend not to be sold with fitted-out kitchens. So, if there had been a boom in home buying because of investment demand, sales of household appliances should have lagged. Sure enough, while home purchases jumped between 2015 and 2017, sales of washing machines and refrigerators show a very muted increase.

Xi wants to develop China’s infant rental market to facilitate continued urbanisation as well as to provide affordable housing. Last July, the central government selected 12 cities with net population inflows to test various rental pilot programmes, and the last eight months have already seen a surge in activity to promote rentals. 

If these trials succeed and the policies are rolled out nationwide, more Chinese households would finally see their main asset generating regular income, and swelling rental revenues should boost the overall share of household income in GDP. 

In the five years to 2015, household disposable income as a share of GDP grew by an average 0.7 percentage points a year. Our back-of-the-envelope calculations suggest that successful development of the rental market could add between 0.12 and 0.24 percentage points a year to the ratio. 

Higher incomes should lift consumer spending, which is also likely to be supported in the first instance by the need to decorate the investment properties in order to let them out. 

Demand for household appliances and other consumer goods is also likely to get a helping hand from another housing policy change, although it is unclear at this stage whether the increase would be recorded in the national accounts as investment or consumption.

The government is trying to change the practice of selling residential properties as bare shells. Various provinces have issued regulations over the past couple of years demanding that properties be sold fully fitted out and decorated. The aim is that by 2020 between half and all newly built properties should meet this criterion. 

For example, last year Hubei’s government said that new publicly built flats would be rented out fully equipped from now on and proposed that by 2020 all new homes built in Wuhan, the provincial capital, should be sold fully decorated.  

There are many reasons for the feeble development hitherto of rental housing in China, and the jury is out on whether the “Go Rental” policy will work. Probably the most difficult obstacle for the authorities to overcome is society’s expectation that a man must own his own apartment before he can propose marriage. Other factors include the lack of trust between landlords and  tenants; weak tenants’ and landlords’ rights; and a welfare system geared towards homeowners.

New technology can help tackle mistrust between landlords and tenants. 

Ant Financial, the payments affiliate of Alibaba Group, launched a home rental service last year, listing more than one million properties on its platform. Tenants with a high enough credit score based on Ant Financial’s rating system can rent an apartment deposit free. 

In April, Shanghai launched a public service rental platform. The city government’s housing agencies will verify listings, register users’ real names and enable contracts to be signed online. 

In 2017, Guangzhou, one of the pilot cities, unveiled a policy giving tenants the same education rights as homeowners. But the fine print that emerged after the initial media hype showed it was too soon to cheer. According to the document, only renters with a Guangzhou hukou, and a small number of people not from the city whom the local government recognise as highly skilled, are eligible. What’s more, renters must register their contracts with the government to apply for the benefits, but few landlords are likely to cooperate as registration will incur a tax. 

Even if “Go Rental” succeeds in boosting household incomes and spending, the second prong of Xi’s housing reform strategy is likely to prove a headwind for the economy: Beijing is determined to arrest the increase in house prices because the rising cost of property, as in many countries, is socially divisive. 

A slew of curbs, including higher down payments, purchase restrictions and controls on when a house may be resold, have been introduced over the past year and a half. They are more likely to be ramped up than eased in 2018. 

In fact, Yicai.com recently reported that Shenzhen, Hangzhou, Xi’an, Chengdu and 11 other big cities have proposed new rules to combat growing speculation in the housing market, signalling the launch of another crackdown. Tier 3 and Tier 4 cities are likely to follow suit.

If the authorities manage to stabilise house prices, households will come to expect their wealth to increase more slowly in future or even decline. That will be especially the case if house prices tumble (unlikely for now). The upshot will be that households will ramp up their savings. 

On balance, the positive, marked effect on incomes from the development of a rental market should outweigh the negative wealth effect, making China’s new housing strategy a net plus for consumer spending. However, more granular data on home ownership are needed for a thorough analysis of the likely interaction of the two effects. 

Beijing’s “Go Rental” strategy is now at the stage where its “Going Rural” policy was at in 2015. Given the remarkable success of that policy to revitalise the countryside, and Xi’s determination to change the dynamics of China’s housing market, we will be watching closely whether renting takes off over the next couple of years. 

Next week’s Enodo Insight will analyse who Xi Jinping really is and what he wants