China's Urban Housing Reform: Welfare to Home Ownership

Overview of the Housing Reform Agenda

The landscape of China has been undergoing significant changes across its political, social, and economic dimensions. These shifts prompted massive changes in infrastructure, and the housing sector was one of the areas most significantly affected — with major transformations in the way the general population was housed and the policies guiding shelter for a growing urban population. The crisis in urban housing was predominantly responsible for the eventual shift away from the welfare housing system that had provided low-cost accommodation in urban areas since the establishment of the People's Republic of China in 1949. Under that system, the government built houses and allowed citizens to occupy them at a nominal monthly rent. In the mid-1950s, a socialist transformation meant the housing sector could no longer support itself financially; fees were reduced, and thereafter the costs incurred after construction could not be recovered (Yang Z. & Chen J., 2014: pp. 15).

China experienced a fresh beginning in the housing sector that brought about a significant change in the urban housing system, moving from welfare housing toward home ownership. This began in December 1978 when the Third Plenum of the Eleventh Central Committee convened in Beijing. It was at this point that China began to move away from the centrally planned economy — a transition that also encompassed the highly centralized housing sector under the previous socialist regime. The housing sector remained critically important to the government, and even as the economy was being decentralized and market forces were being allowed to shape most economic activities, it was extremely difficult for the government to relinquish control of housing entirely. Consequently, several experimental projects were carried out to explore the commercialization of urban public housing.

The Housing Reform: Stages and Policies

In 1980, China's paramount leader Deng Xiaoping signaled the need to liberalize the housing sector to compete in a market-driven economy. He indicated that individual citizens should be allowed to own homes through purchasing, building their own, or buying older government-built homes — with repayment periods of ten to fifteen years. He also indicated that rent fees in public sector housing would be adjusted upward, a measure designed to encourage citizens to buy or build rather than rent, since the financial implications would become comparable. At the same time, he acknowledged that low-income citizens would need to be subsidized (Liu Z. & Mei C., 2013: pp. 9–10). The new housing policies were aimed at fostering a closer relationship between the private and public sectors as the private sector was being actively brought into housing construction.

Deng Xiaoping's declaration was a landmark turning point for the public housing system that had been in place for more than thirty years, and it opened the door for subsequent policies that would work toward implementing the desired changes in the housing sector. It gave way to experiments and policies designed to shift the public housing system from a welfare structure to a market-driven ownership model. Several cities served as pilot projects for the sale of public sector houses and for reorganizing housing production to ensure adequate returns on housing investment. These transition measures ran on an experimental basis between 1980 and 1988. Throughout this period, the public sector retained a leading role in housing, while private housing accounted for approximately 19% of the total by 1990 — only modestly higher than the 17% recorded in 1982. The more significant change was that work-units began to exercise greater control over public housing than local authorities had previously held.

The ideology of privatizing the housing sector was a noble initiative; however, the government remained convinced that the socialist model provided superior social equity, and feared that complete privatization would drift the system toward capitalism, which was seen as detrimental to ordinary citizens. This concern made the central government cautious about instituting fundamental structural changes with respect to property rights. As a result, the government focused more on improving efficiency within the public sector by allowing citizens and their organized groups to take control of leasing rights over public property. This indicated that the central government, in pursuing economic reform, was more oriented toward the marketization of housing than toward outright privatization. The government sought to introduce competition among private players without necessarily privatizing public property. To achieve this, state agencies and locally owned enterprises were encouraged to compete with each other while ownership remained with the state or local government.

Some of the significant policy shifts during this period included the mass selling of government-owned public houses at construction cost only, without adding additional charges. Public housing sales were also heavily subsidized, and for properties that remained in the rental stock, rents were increased steadily each year to encourage tenants to purchase rather than continue renting. In 1984, the concept of real estate was officially and legally recognized in order to encourage more people to build and sell houses privately. However, because the socialist approach to property ownership remained dominant, many of these houses were still built and purchased collectively in most instances (Hui X., 2009).

This first attempt at the commercialization of housing did not work particularly well, largely because of the conservative approach taken. The ten years of experimentation changed little in China's housing landscape. Housing shortages persisted in urban regions, allocations of public property were skewed toward influential and wealthy families, investment in the sector remained minimal, and management of publicly rented houses and property remained poor. Steadily increasing rents were resisted by tenants in the context of high inflation. The favoritism shown toward wealthy families attracted criticism, and rather than increasing public home ownership, the reforms ended up increasing housing expenditure in family budgets. The experimental housing redistribution had essentially failed to deliver the transformation that had been envisioned.

The failures of the initial ten years prompted a response beginning in the early 1990s with a shift in ideological, social, and economic approaches. The top-down approach to housing reform continued, this time with a confirmed commitment to marketization. The "Socialist Market Economy" was adopted at the 14th National Congress of the Communist Party, marking a significant change in direction for housing reforms and a decisive departure from the planned economy. Land was an inseparable part of this change: in 1990 the law was amended so that previously state-owned land in China was treated as a commodity. With the release of land-use transfer rights under the new market economy, real estate development grew rapidly — but so did land and housing speculation. This speculation caused the economy to overheat, prompting the government to increase levels of "macro control" to moderate the real estate market.

In 1994, another significant decision escalated housing reform to the level of a comprehensive urban housing system. Two complementary sets of policies were envisioned to ensure adequate urban shelter. The first was affordable housing with social security provisions for low- and middle-income families; the second was a market housing system intended for higher-income families. Both sets of policies were oriented toward owner-occupied housing rather than rental. However, provisions for rental housing were retained within the new approach for those who needed them.

This new housing reform policy spurred real estate growth across China's cities and was seen as an efficient mechanism for increasing government revenue and promoting economic development. It was during this period that the majority of welfare housing transitioned to private ownership in urban areas.

Even within this new marketization approach, problems persisted. Privileged groups continued to occupy housing designated for low-income families. The housing accumulation fund designed to enable low-income families to own homes was restricted to government agencies and public institutions, excluding the private sector entirely. The coexistence of the market-oriented housing system and elements of the planned economy also presented challenges, as their respective conceptions of property ownership were fundamentally at odds.

The years after 1998 saw a consolidation of reform measures and the regulation of the urban housing market. The approach shifted definitively from the socialist model to full marketization. There was a prevailing belief that the housing economy had been distorted and that a free market was the solution. A mono-structural housing stock dominated by private owners was developed, and capital accumulation was encouraged as a driving force behind housing reforms. Cities embraced this capital accumulation approach and actively encouraged real estate development to attract investment (Yang Z. & Chen J., 2014: pp. 23–25). The Chinese government adopted measures to fully marketize the urban housing stock and promote real estate development as a means of sustaining the economy, particularly in the aftermath of the 1997 Asian financial crisis. Welfare-based urban housing ownership was entirely abandoned, and affordable houses were developed that were sold — not rented. These 1998 measures led to the privatization of public housing, and the government almost completely withdrew from the housing stock. The terms of real estate now depended purely on market forces, which drove a sharp increase in owner-occupied urban housing to 81.6% by 2005 (Hui X., 2009: p. 384). Finally, in 2004, a constitutional amendment legally recognized private property and private housing.

The Housing Reform's Main Measures

The housing reforms featured several outstanding characteristics that the government deliberately set out to implement. Public houses were made available for sale, and tenants were ultimately required to purchase them using subsidies rather than continuing to rent at low cost. A national housing provident fund — a dedicated savings mechanism — was established specifically to enable low-income citizens to accumulate the capacity to own homes and repay over time. Rents in formerly welfare-designated public properties were steadily increased, with the explicit aim of encouraging tenants to purchase rather than remain as occupants. The commercialization of the housing sector introduced a market-oriented approach that allowed for improved management and maintenance of housing stock. From 2003 onward, the housing reforms were also characterized by the construction of lower-cost homes sold to middle- and low-income families. Since the reforms took hold, professionally managed and socialized housing management emerged as a defining feature of the new system.

Conclusion

The housing reforms envisioned at the inception of the project have been met by a wide variety of challenges at each stage of their development. Nevertheless, the government of China has persistently taken corrective measures over the years to make housing a national priority, and in doing so has delivered a broadly successful housing program for its citizens. The housing reforms have contributed to economic development, and the trajectory of the program appears to be headed toward its intended target of housing for all — with a minimum standard of one house per household.