Housing costs key constraint to Chinese consumption

By Yi Xianrong Source:Global Times Published: 2018/10/7 20:38:39

Illustration: Luo Xuan/GT

On September 20, the Chinese government released new guidelines to support domestic consumption. The measures in the guidelines aim to create a secure consumption environment with better quality standards, credit systems and rental housing markets. With those measures, the country hopes to drive up domestic demand and stimulate consumption.

China has a huge market of 1.4 billion people. Once the market gets going, the impact generated by the US-China trade war can be easily offset, but only if people have enough consumption ability. China has become the world's second-largest economy, but its consumer market is still less than one-eighth that of the US, which hardly matches its economic position.

The ability to consume is both the premise and the major problem. The Chinese market can provide sufficient merchandise. Shopping plazas are ubiquitous in almost every major city, and they're full of things to buy - but sales staff often outnumber shoppers.

Some of the empty malls can be attributed to e-commerce. But the limited consumption ability of the Chinese people is also a cause. With China's great manufacturing ability, as long as there's consumer demand, supply will be there. But without consumption ability, even the best stimulus policies and optimal consumer markets won't prompt people to spend.

The reasons for insufficient consumption are many: income disparities, high education and medical expenses, and expensive housing. Of these, it's property prices that have severely restricted consumption in China.

High real estate expenses have two aspects - housing prices and rents are both too high. A reasonable home price should be three to six times the median household income. That means a family with an average income can buy a house with three to six years' annual income. The house price to income ratio in China is above 50 in the first-tier cities and 30 to 40 in the third- and fourth-tier cities.

But the whole country, from policymakers to real estate speculators, has turned a blind eye to the problem. These high housing costs are squeezing the consumption ability of Chinese people.

Another issue is rent, which takes up too much of the income of many consumers. Incomes of rental tenants should be lower than the national average household income, since renters are usually low- or middle-income people who can't afford to buy.

A reasonable rent should not be more than one-third of their income. But in Beijing in many cases, the figure is more than half of the tenant's annual income. Some people claim that rents are too low in comparison to purchasing prices. But the rent-to-price ratio is more like an investment return. If prices are soaring, rent returns are lower, but that doesn't mean rents are too low.

These two factors together show that housing costs too much in China. High housing costs have a crowding-out effect on consumption. Surging housing costs have also postponed the average marital age in China and discouraged population growth. Personal mortgage burdens have soared, resulting in heavier individual debt burdens overall, which eat into disposable incomes. Unless this changes, residential consumption will be curbed.

In a modern society, housing is a basic right, and providing affordable housing is an important government responsibility. In China, houses have become a tool for governments, businesses and some individuals to make profits at the expense of the majority in recent years. If the situation does not change, people won't be able to spend more and domestic demand won't prosper. Therefore, the government must control rocketing house prices to boost domestic demand.

Germany's experience can shed light on how to deal with the problem. In Germany, real estate, media, education and medical care are designated as public sectors in order to protect people's basic rights from cradle to grave.

Special regulations apply to land prices, investment returns, earnings from real estate transactions and rental income to prevent homes from becoming speculation tools. Also, there's plenty of public housing supplied by the government, so house prices and rents are kept at reasonable levels.

To lift consumption, China must lower housing costs by using effective policy measures. Otherwise, we can't expect to see higher consumption.

The author is a professor with the School of Economics at Qingdao University. bizopinion@globaltimes.com.cn


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