top of page

China desperately needs low-income migrant workers to buy homes and save the economy

Your future home awaits.	(Reuters/Stringer)

BEIJING (Quartz) - In the past few years, China has relied on its astonishingly high number of rural migrant workers to pour into factories and construction sites and fuel its economy. Now, migrant workers are again seen as a solution for sustaining the country’s economic growth—this time by buying houses in China’s cities.

China has taken a series of measures in recent years to encourage white-collar workers to buy into its housing glut. But now the upper segment of the market is becoming saturated, and the government has no alternative but to turn to its low-income residents if it wants to avoid an economic meltdown.

“You come to a point where you cannot ignore the lower-end demand anymore because there is no demand at the higher end,” Rosealea Yao, a China investment analyst for research firm Gavekal Dragonomics, told Quartz. “That will tank your construction volume. And if your construction volume is falling too fast for too long, your economy is collapsing because one-third of GDP growth is coming from real estate and construction.”

“This is why you see China’s growth is slowing so fast,” she added. “From the government perspective, it’s not just about being nice to the low-income group.”

Out of reach

To entrepreneur Jiang He, a 34-year-old Beijing transplant from the city of Xuzhou in the Jiangsu province, buying a house has always felt out of reach. He first moved to the capital in 2000 to work as a security guard. He then tried his hand at selling international phone cards, but the rise of the Internet killed the business. He went back home to work in construction, but returned to Beijing in 2012 to found an express delivery business on the campus of Beijing International Studies University.

But his rising ambitions and status are no match for Beijing’s housing prices.

“I want to buy a house with three bedrooms because we have two children, but the price is two million yuan (about $300,000),” Jiang told Quartz.

Most migrant workers would fall even shorter than Jiang does. Of China’s 270 million migrant workers, only 1% own homes (link in Chinese) in the cities where they work, according to the National Bureau of Statistics (NBS). They’re almost exclusively “migrant bosses”—business owners who sometimes buy apartments as investments, a real estate agent in Beijing’s Tongzhou district told Quartz (he didn’t want his name revealed).

Ghost towns

But it’s the smaller cities that have most of the excess housing. Almost 90% of the nation’s unsold houses are located in second- to fourth-tier cities. The most affected are small cities in the industrial northeast and along the coast. Cities like Hefei (in the Anhui province) and Hangzhou (in the Zhejiang province) have veritable “ghost towns” appended to their outskirts, the result of overconfident municipalities that saw that new construction raised their GDP and brought revenue from land sales.

The Tianducheng development outside Hangzhou is a virtual ghost town, never mind a touch of Paris. (Reuters/Aly Song)

Estimates on just how much unsold housing inventory China has vary considerably. Yao puts it at three billion square meters, and says it will take about three years to sell the glut. NBS reports a much lower figure (link in Chinese)—686.3 million sq m at the end of October 2015, up 17.8% from the previous year—but its figures are often unreliable. HSBC puts the figure at 1.8 billion sq m. That’s enough to house about 90 million people (more than the population of Germany), says Julia Wang, an HSBC economist focused on Greater China.

Whatever the precise amount, it’s largely the result of misplaced optimism—and it now threatens to topple the national economy.

Most of the new-home construction occurred in the years following the global recession, when China invested trillions (paywall) of yuan to build roads, railways, and apartment buildings in an effort to stave off an economic downturn.

A national priority

Now, China’s top officials are not even trying to keep secret the looming risks associated with the housing market. During a cabinet meeting in December, premier Li Keqiang said that destocking the property market is a national priority (paywall). Even president Xi Jinping said, during an economic meeting on Nov. 10, that the government needed to “draw down the housing inventory” and “strive to achieve healthy development of the property industry,” reported the China Daily. (It noted he hadn’t commented specifically on China’s housing market since the fall of 2013.)

At the Central Economic Working Conference in December 2015, an annual meeting where leaders discuss economic policies for the following year, selling urban houses to migrants was listed as one of China’s main economic strategies for 2016, right up there with allowing outdated state companies to go bankrupt and promoting innovation in startups.

The housing crisis is already visible in the construction market and in macroeconomic numbers: New construction starts were down 15% in 2015, which was the second consecutive year of decline, according to a Gavekal Dragonomics report. Steel production decreased in 2015 for the first time in over two decades, influenced by the weak construction starts. Even though new incentives such as interest-rate cuts and the removal of purchase restrictions brought a 10% boost in property sales by floor area last year, Gavekal analysts predict a 3% decrease for 2016.

The slowdown in housing investment (or construction starts) “shaved 1 percentage point off GDP growth in 2015,” HSBC’s Wang wrote in a report released in February.

The risk is indeed macroeconomic, said Yao of Gavekal Dragonomics: “If you have recession in the industrial sector, in manufacturing, and too sharp of a decline in GDP growth, there’s a macro risk. You have instability in the bank system because a lot of coal producers or steel producers do not produce any more, so they have no way to pay back the debt.”

Past policy mistakes

China’s official strategy and the homeownership dreams of migrant workers seem to be in line, so why are there not more migrant homeowners?

First, there’s money. Chinese migrant workers made an average 2,864 yuan ($573) per month in 2014, according to the NBS (link in Chinese). That’s at most 70% of the cost per square meter for apartments in small cities (link in Chinese), and only a fraction of the price in Beijing or Shanghai.

China historically has not supported its blue-collar workers to become homeowners. The country privatized its first homes in the late 1990s, as a response to the Asian financial crisis (boosting exports was the other major strategy adopted then). So the government basically allowed some urban residents to buy the homes they were living in at relatively low prices. This was considered an “implicit transfer of wealth” from the government to the households, noted Gavekal in a 2007 report (paywall), estimated at 4.5 trillion yuan, or a third of China’s 2003 GDP.

The buyers were white-collar, urban residents who had access to well-paying jobs and social services. Later on they took out cheap credits to upgrade their houses or buy a second or third property as investment. All the while, rural residents and migrant workers were left behind.

To help them afford new homes, the government will need to come up with new forms of subsidies. It’s done a bit of this already. In February it cut minimum down payments to 20% for first homes—all all-time low—and also reduced transaction taxes.

The government also needs to reform the cumbersome system of hukou, or household registration documents, as premier Keqiang noted last December. For decades people in China have been divided into two categories: urban vs. rural hukou holders. The later have received fewer benefits in cities—public schools, health care, social security—even if they lived there for work. They also couldn’t buy property there, assuming they could even afford to in the first place.

In 2014 the government loosened the restrictions a bit, helping migrant workers get hukou in smaller cities—but not in the bigger ones where many of the jobs are. A new regulation effective from Jan. 1 this year requires every city in China to offer a baseline of public services, mainly health care, for migrant workers that have lived in the city for at least six months and have a stable job. But it also allows each city to determine the specific benefits on offer, such as affordable housing policies.

Still, China now plans to register as many as 100 million rural migrants as urbanites by 2020. Last month officials announced that migrant workers will be integrated into larger cities in an orderly way over the next five years.

“It seems wishful thinking, but in reality this is something that’s bound to happen,” Yao said. “Otherwise it’s just too damaging for the economy.”

As for Jiang, he’s doubtful he’ll benefit from any policy changes. Even if he could afford the kind of home he wants in Beijing, he lacks a hukou for the city, without which he cannot buy property in it. And he’s guessing any upcoming policy changes will be more likely to benefit migrant workers employed at state companies, rather than entrepreneurs like himself.

For now, he’s resigned to renting. Not that he’s satisfied. Owning a house in Beijing means that you’ve settled down and have some guarantee, he said.

“If you just rent a house, you don’t feel like you are a Beijinger,” he added. “You feel like you can go away at any time.”

Qu Chaonan contributed reporting.

bottom of page