China Pins Hopes on Public Housing

By JAMES T. AREDDY in Chongqing, China, and BOB DAVIS in Beijing

Building low-cost housing projects is part of the Chinese government's plan to restructure its housing sector. But some say it's a risky strategy for the already shaky real estate industry.

One of the biggest public-housing projects in history will help determine whether China can remake its real-estate sector fast enough to prevent its economy from flaming out.

China is in the midst of a crash program to build 36 million subsidized apartments by the end of 2015—enough units to house the entire population of Germany. The goal is twofold: to head off social unrest by ensuring decent places to live for low-wage workers, but also to cushion an expected fall in high-end construction—the result of policies to tame property speculation—by ramping up construction at the low end: so-called social housing.

"Social housing is the No. 1 priority when it comes to support economic growth, ensure social stability and bring down average housing prices, as far as the government is concerned," said UBS analysts Tao Wang and Harrison Hu in a recent note.

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China's social-housing program on display in Chongqing, which is trying to lure migrant workers from the coast with cheap places to live.

The slowdown in China's growth is becoming evident in nearly every new release of economic data. On Friday, a manufacturing survey indicated contraction for a second straight month. Exports, which along with real estate have become the economy's biggest question marks, showed a pronounced dip in the HSBC's Purchasing Managing Index, which came in at 48.7 in December, below the 50 reading that marks expansion.

Beijing's trading partners are closely watching its economic shifts: China's construction sector uses as much steel annually as the U.S., Japan and Germany combined, Ms. Wang notes. Glass, concrete, energy, furniture, home appliances and other industries also rely on China's housing market.

In China, those sectors account for more than 25% of GDP, and the social-housing push thus aims to be a form of economic stimulus that could spell the difference between a gentle slowing of China's growth—or a sharp plunge.

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But the vast experiment faces a number of pitfalls that could risk damaging a crucial economic engine at a time of weakness elsewhere around the globe. Those problems include inflated accounts of progress, shoddy construction and problematic financing.

One of China's most ambitious social-housing efforts is under way in the southwestern metropolis of Chongqing.

Last month, Xiang Yuankun, a 26-year-old Chongqing factory worker, moved into a two-bedroom rental for just $85 a month. He snagged the apartment after entering a lottery for those earning less than 2,000 yuan, or $315, a month and living in less than 13 square meters, or 140 square feet, the size of a parking space.

His new apartment "is a privilege," he says.

But critics argue that Beijing is mismanaging the social-housing effort. While the central government set the housing goal, it has largely left the implementation and financing to local governments, which get much of their revenue by selling land to developers for luxury apartments, not low-profit housing.

There is widespread suspicion that Chinese municipalities are inflating the number of apartments they are building, or relabeling projects already under construction as social housing. In November, for instance, the Ministry of Housing said work on foundations was sufficient to qualify as "housing starts," prompting derision that it was counting holes in the ground. Of 30 developers surveyed by Standard Chartered Bank, 21 said that less than 30% of the social housing being built was actually new construction.

The social-housing project may also lead to bad loans a few year's down the road. "The lion's share of the funding comes from the [state-owned] banking system," said He Fan, an economist at the Chinese Academy of Social Sciences. While apartment sales may turn a profit, rental properties probably won't, which "will be a heavy burden for banks," he said. He compares the program to "highways in the desert," which he claims some local governments have built to meet highway-construction targets.

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Chongqing alone plans 40 million square meters, 430 million square feet, of subsidized apartments, an area 10 times larger than New York's Central Park. That's about 690,000 apartments the size of Mr. Xiang's 58-square meter (624 square feet) abode though many will be larger. The sprawling municipality has lots of land at its perimeter to devote to the effort. Chongqing also hopes to turn a wave of migration into a labor pool for the low-wage manufacturing industries it is trying to lure to move from China's coastal areas. For this to work, cheap housing is a must.

There is plenty of evidence of rushed efforts. Wang Yulan, a 56-year old retiree, moved into her new city-built apartment in a 33-floor Chongqing tower three months ago and immediately found a broken cupboard hinge, leak stains on both sides of her short foyer and badly misaligned window sills.

The city's mayor, Huang Qifan, dismisses criticism: "It is just like using a magnifying glass to check the quality of the skin of a beautiful lady," he says.

Mr. Huang has chosen a risky strategy: locating the bulk of the housing many miles from the crowded downtown in the hope that the new towns will eventually develop into new centers of activity. Chinese policy makers' build-it-and-they-will-come approach has worked in some cases, most prominently in Shanghai's bustling Pudong district. But in other cases, it has led to the construction of so-called ghost cities: neighborhoods devoid of tenants or employers.

Critics point to a proliferation of ghost towns as evidence that China's real-estate market is a bubble that's bound to burst in a way that will badly damage the Chinese economy.

A looming supply of cheaper housing may be one factor now undercutting demand for property and also prices. In Shanghai, China Overseas Land recently discounted a batch of apartments by 25%. Nationwide in November, apartment prices were 0.17% lower than the previous month, the second month of falling prices, and some analysts predict new apartments may sell for about 30% less in 2012 than they did this year.

"The country will maintain its unswerving stance of the regulation of the property market next year to make housing prices return to a reasonable level," the China's Politburo, the Communist Party's top decision-making body, said in a statement on Dec. 9.

To compensate the government is doubling down on its bet on social housing.

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A worker on a construction site on the waterfront of the Jialing River, a branch of Yangtze river, in Chongqing.

Set more than 40 kilometers (about 25 miles ) from Chongqing's downtown, Xiyong Micro-Machinery Industry Park Low-Cost Housing Project consists of more than 55 buildings topping 30 floors, each painted pale green with white trim and some draped with red banners with hammer-and-sickle logos of the Communist Party. The nearly complete project consists of 20,000 two-bedroom and studio apartments. Each rental unit is furnished with a stove and toilet-shower room, but no hot water or closets. Refrigerators may need to go in the living room. Many units have patios.

Outside the front gate, there's a new stainless-steel bus shelter for a yet-to-come bus route. A subway is planned, but won't open until 2013. Across the quiet eight-lane byway near the project is farmland. A villa development and a mall called "Premier Intellectual City" flank the low-cost housing project. Nearby, workers are putting the finishing touches on an electronics factory. It is a far cry from the glitzy $3.5 billion luxury apartment-hotel-mall project Chongqing has just announced for its downtown.

Rosealea Yao, a real-estate specialist at Dragonomics Research in Beijing, is skeptical that projects in the deep suburbs will generate enough revenue to cover the interest on the loans taken out to build them, producing a drain on the city's budget for years to come. Many of the apartments are too small, she adds, to convince migrants to bring their families to live with them, making them little more than nicer versions of migrant dormitories.

The Chongqing city government says it can comfortably finance the projects and would subsidize its cost. "We don't have to worry about a bubble or nonperforming assets," said a statement by the mayor's office.