With one arm, China is pouring cold water on property speculators. With the other, it is tossing a life buoy to the real estate sector via increased spending on affordable housing.
It is a tricky balancing act, and the stakes are high.
The government must rein in housing prices before a bubble forms, while ensuring that investment in property, a cornerstone of the economy, remains robust.
The early verdict is that Beijing might just pull it off, having made the construction of public housing a priority for officials throughout the country at a crucial juncture in the Chinese political cycle.
"The affordable housing scheme can partly compensate for a slowdown in market-based real estate investment this year. The top leadership has repeatedly demonstrated very strong political will on this issue," said Yu Jun, a property analyst with CITIC Securities, China's largest listed brokerage.
China tried to push public housing before, but investment was halting and controversy erupted when some of the homes ended up in the hands of relatively wealthy people.
Meanwhile, property prices have continued their seemingly inexorable climb beyond the scope of affordability for most Chinese, fuelling public anger that the government is now trying to assuage with its most ambitious programme ever for cheap housing.
The government plans to build 5.8 million housing units for poorer citizens this year, which analysts estimate will involve spending of up to 400 billion yuan ($59 billion). That compares with total investment in real estate of 2.39 trillion yuan in the first seven months of the year.
It may not sound like all that much is going into public housing, but it should provide a real boost to the economy.
Total floor space under construction could rise 10 percent this year and 6 percent next year, even if private investment flatlines, Morgan Stanley strategist Jerry Lou estimated.
"There is a common concern in the market about the extent to which social housing can compensate for a slowdown in the commodity housing market. Our analysis shows that social housing is a good growth compensator," he wrote in a recent note.
Popping the bubble
Earlier this year, property prices were soaring across China. Some top-tier markets -- notably, the southern island of Hainan -- were in a state of frenzied buying, and others looked frothy.
Worried that a bubble could grow out of control, the government raised down-payment and mortgage rates and curbed lending to developers.
In recent months, as the Chinese economy began to slow and global markets dipped, some observers predicted that Beijing would back down and relax its tightening campaign.
But top leaders have held fast to their line.
This was crystallized two weeks ago when Vice Premier Li Keqiang, heir apparent to Premier Wen Jiabao, used a visit to a series of public housing projects in Beijing to say that the crackdown on property speculation would continue.
The government was stepping into the breach, he said.
"The affordable housing scheme is an important step to improve people's lives and also an important measure to maintain stable and relatively fast economic growth," Li said.
In the past, promises to build more affordable housing amounted to little. Not enough was built, and much of what was built went to families who did not need subsidized homes. Analysts expect better follow-through this time.
"My optimistic estimate is that the government will implement half of its plan this year," said Bai Hongwei, a property analyst with China International Capital Corp.
That alone could account for about 1.24 percentage points of GDP growth in 2010, he said. Economists polled by Reuters expect the Chinese economy to expand by 10 percent this year, up from 9.1 percent last year.
Local leaders have traditionally chased higher growth at all costs, with assessments of their performance based largely on economic results. In May, Beijing instructed officials across the country to sign letters of responsibility, stressing that construction of affordable housing would form a key part of their appraisals that weigh in deciding promotions.
With the government set for a big reshuffle from late 2012, officials will not want to disappoint.
The societal need for cheaper housing is clear.
There are only enough affordable homes in China now for about 6 percent of the urban population. The country needs to build 50 million more units to increase the coverage to 30 percent, and that could take another 30 years, Bai from CICC said.
"The affordable housing market has huge potential and we are optimistic about it as a driver of economic growth," he said.
Bringing developers on board
The government has plenty of money to build homes. What it lacks is expertise in building attractive apartments. For that, it is trying to bring in real estate developers, calling on them to oversee construction and management.
"The overall interest (of developers) is not very high," said Xu Ke, a project manager with Vanke in Beijing.
Xu looks after an affordable housing development with 1,575 flats that was built in 2007, one of the first in the capital.
Vanke had hoped for a profit margin of 5-10 percent, but it cut that to 3-5 percent after sales slowed when Beijing started to screen buyers more carefully, to ensure that only deserving people were getting homes.
Despite the shortfall, Vanke, China's biggest listed developer, is still committed to the scheme.
"The government is directing 50 percent of residential land supply to the affordable housing sector. As a mainstream developer, we must take part," Xu said.
Liu Yajuan, a housewife in her 50s, was one of the lucky few, awarded a permit to buy a unit at the Vanke project at 6,200 yuan (about $915) per square meter, less than a third of the going rate in the neighborhood.
"My son has got a new home and so can get married at last," she said after touring the apartment for the first time.
"I'm satisfied with everything, except that there is no balcony," she said.
The local residential market is undergoing a positive development: affordable housing is on the rise, according to the consulting firm CB Richard Ellis.
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