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Many people must have paid close attention to the recent Third Plenary Session of the 20th CPC Central Committee. The meeting released several strong signals, one is to improve the real estate tax system, the other is to increase local independent financial resources and expand local tax sources.

This will be of great benefit in alleviating the tension in local fiscal revenue and expenditure after the decline in land finance.

In the future, real estate tax will definitely be implemented. However, this tax is extremely complex and will affect the entire system, so it cannot be introduced immediately in the short term.

Therefore, the most urgent task for local governments is to find ways to increase revenue and fill their pockets as soon as possible.

Recently, Hubei made a big move. The Housing and Urban-Rural Development Bureaus of 17 prefecture-level cities in the province were renamed as Housing and Urban Renewal Bureaus, including Wuhan, Xiangyang, Xiantao, Shiyan, Qianjiang, Jingzhou, Huanggang, Huangshi, Enshi Prefecture, Shennongjia Forest District and other places.

This is not a unified deployment by the higher authorities, but a "self-action" by the local authorities. As the times change, Hubei has taken the lead and is the first to try it out.

Don’t underestimate this small name change, as it implies a huge subversion of China’s real estate chess game. One era has ended, and another has begun.

The turning point has arrived and no one can stay out of it.

If you search for Wuhan Municipal Urban and Rural Construction Bureau on the Internet, you will find that the website has been discontinued and replaced by the Wuhan Municipal Housing and Urban Renewal Bureau website.

Some people may ask, didn’t cities such as Shenzhen and Chengdu already establish relevant “Urban Renewal Bureau” agencies? What’s so surprising about Hubei’s move this time?

In fact, there is a lot of knowledge involved here.

The Housing Renewal Bureaus in Shenzhen, Chengdu and other places are actually second-level departments under the Housing and Urban-Rural Development Bureau, and are still under the jurisdiction of the Housing and Urban-Rural Development Bureau. However, the Housing and Urban Renewal Bureaus in various cities and prefectures in Hubei are first-level departments and are directly under the jurisdiction of the municipal government.

Moreover, it is not only the name that has changed, but more importantly, the focus of work has undergone a historic change. In the past, the Housing and Urban-Rural Development Bureau paid more attention to the incremental market of real estate, focusing on land sales, housing construction, and infrastructure construction.

The current Renewal Bureau is more focused on the existing real estate market, focusing on the renovation of dilapidated houses, renovation of old communities, etc.

In fact, an invisible undercurrent has long been surging across China. The renaming of cities and prefectures in Hubei Province can be traced back to the top-level design.

In July 2023, central bank officials pointed out that the supply and demand relationship in my country's real estate market has undergone profound changes. Ten days later, the Political Bureau of the CPC Central Committee stated for the first time in history that it is necessary to adapt to the new situation of major changes in the supply and demand relationship in my country's real estate market and adjust and optimize real estate policies in a timely manner.

Translated into plain language, China's real estate game has changed from a situation of shortage of supply to an oversupply of supply, and from an era of large-scale development to an era of large-scale transformation.

The change of this critical point will determine the fate of the entire real estate market in the next ten or even twenty years. Hubei's name change this time can be said to be in line with the trend.

In the early days of reform and opening up, with the rapid development of industrialization and urbanization, a large number of people flocked to cities to buy real estate. Before 2012, the number of people entering cities each year far exceeded the number of new houses sold and completed, and supply was in short supply. Take 2001 as an example, the number of newly added urban households was 7.545 million, and the number of completed units was only 2.414 million.

However, since 2017, the area of ​​commercial housing for sale in China has continued to grow. As of September 2023, the total area of ​​commercial housing inventory for sale has reached 645 million square meters, of which the residential area is about 310 million square meters (excluding commercial and residential properties in commercial buildings).

If the per capita housing area in urban areas is 35 to 40 square meters, the current stock of houses can accommodate 8 to 10 million people. In addition, in addition to the commercial area currently for sale, there are 1.2 billion square meters of newly started but unfinished real estate under construction, totaling 1.945 billion square meters.

Starting from 2022, real estate policies will enter a cycle of marginal relaxation, but as of March 2024, the narrow inventory of commercial housing in 80 cities in my country still reached 488 million square meters, about 85% of the 2015 peak, and the sales cycle climbed to a historical high of about 27.2 months.

However, in contrast to the rapid growth of inventory, the population has shown an irreversible downward trend. The birth rate is falling, the total population is decreasing, the low birth rate is expanding, the aging population is deepening, and the urbanization rate is slowing down.

The result is a simultaneous decline in housing demand.

Without the support of the population, who will take over this huge amount of real estate if large-scale demolition and construction continue? The turning point of history has destined the era of large-scale real estate development to end.

Of course, this does not mean that the real estate market is at the end of its road. The existing housing stock has opened up a new hole in the real estate market.

One benefit of turning the Housing and Urban-Rural Development Bureau into a Renewal Bureau is that it finds a new outlet for government investment through the renovation of old residential communities and avoids ineffective investment.

As the balance sheets of enterprises and residents shrink, people have shifted from pursuing profit maximization to minimizing debt, and are less willing to invest and consume. Naturally, government investment has become the most powerful hand supporting the economy.

However, relying on the support of land finance, local governments have launched one infrastructure boom after another. After more than 20 years, almost all the places that should be built have been built, and there has even been "excessive infrastructure" and "ineffective infrastructure".

A city in Hainan invested over 40 million yuan to build a high-speed railway station. The station building covers an area of ​​nearly 2,000 square meters, but it has not been used for eight years. This is just a small city with a population of one million, but there are three high-speed railway stations. Everyone is confused by this operation.

This is not the most outrageous thing. Although a city in Guangxi is only a third-tier city, it has nine high-speed rail stations. Although it is a tourist city, it is not so "inhumane". There is a station that has invested more than 50 million yuan, but there has not been a high-speed train stop for more than half a year. The platform staff may have more than passengers.

According to incomplete statistics from the media, there are at least 21 high-speed rail stations that have been built but not put into use across the country, including some in first- and second-tier cities.In order to quickly increase GDP, local governments are selling land and making money while spending money on major infrastructure projects, including high-speed railways, bridges, and subways.

With the economic slowdown in recent years and the contraction of the real estate market, many infrastructure projects have been halted.

In 2021, Chengdu Metro's long-term line network will be adjusted from 55 to 36;

In 2022, the planned mileage of Hangzhou's approved fourth-phase subway was reduced from 299.8 kilometers to 146.9 kilometers;

In 2023, Nanjing will cancel Line 13 in Jiangbei and Line 12 in Jiangning;

In 2023, Shenzhen's public fifth-phase subway plan will reduce the number of lines from 13 to 9, and the mileage will be reduced from 226.8 kilometers to 180 kilometers.

In the future, this situation may spread to more and more cities.

Continuing to spend money in saturated fields will only eventually turn into local debt and raise a gray rhino that may go crazy at any time. It is unlikely to have much positive effect on sustainable economic growth, but rather mostly negative effects.

Therefore, the renovation of old residential communities provides another avenue for government investment.

I don’t know if you have been to Tokyo, Japan, and have seen that many houses that are 30 or 40 years old do not look that old, either from the outside or the inside. However, China’s high-rise residential buildings are rapidly becoming “slums”, and due to the lack of repair and maintenance, they may start to age within ten years.

Not to mention those built earlier. By the end of 2022, about 20% of the existing houses in Chinese cities and towns are more than 30 years old.By around 2040, this figure may reach 80%.

Some of them have inadequate sanitary facilities, some have poor lighting and ventilation, and some have outdated natural gas heating equipment. Some lack public service facilities such as cultural and sports activities, elderly care, smart convenience, and elevators. In the future deeply aging society, these will all constitute big problems.

According to statistics from the Housing and Urban-Rural Development Bureau, there are more than 30 billion square meters of stock housing in cities and towns across the country, and a total of about 220,000 old residential areas need to be renovated and updated. This can leverage a lot of government investment.

Take the installation of elevators as an example. The current funding source for installing elevators is mainly subsidies from provinces, cities and counties. Generally speaking, the three-level subsidies in the eastern region total about 200,000 yuan, and in central and western cities it is 100,000 to 200,000 yuan, accounting for about 1/3 of the cost of installing elevators, and the rest is borne by the residents themselves.

Looking at the whole country, how big is the cake?

Evergrande Research Institute divides the calculation into three categories according to the transformation content:

First, the basic infrastructure renovation, with an estimated investment of about 1.2 trillion yuan, including water, electricity (including communications), gas, roads, street lights, security facilities, fire protection facilities renovation and illegal building rectification, household waste classification, corridor repair (including corridor lighting renovation), greening and beautification, etc.;

The second is the upgrading of infrastructure, with an estimated investment of 2.66 trillion yuan, including the construction and optimization of parking lots, repair of public parts of buildings, installation of elevators, construction of functional rooms, etc.

The third is the transformation of public service facilities, with an estimated cost of 680 billion yuan.

Someone has calculated that the current total market value of China's real estate is about 50 trillion yuan. Based on a 2% urban renewal conversion rate, urban renewal may bring a huge market of about 10 trillion yuan.

In the current economic environment, urban renewal can release new economic value every year, which is also a very rare contribution. Compared with ineffective investment and overinvestment in other fields, this will be one of the best solutions for effective government investment and a means to support economic development.

Today, houses and infrastructure are aging just like our population. This means that the era of large-scale demolition and construction is over, and the era of large-scale maintenance has arrived. We will fully enter the post-infrastructure era dominated by "renewal".

Of course, the way of playing in the future will be different from the past. The era of large-scale development requires a large amount of capital investment and expectations of future land value increases. In the past, the economic growth rate was soaring, and land finance was the bottom line, so local governments had the confidence.

However, in today's era of large-scale maintenance, maintenance cannot be completed overnight, but is a long-term process, so the requirements for cash flow stability are higher. This requires local governments to reduce debt risks as soon as possible and go into battle with a light load.

Another benefit of turning the Housing and Urban-Rural Development Bureau into a Renewal Bureau is that it can drive economic growth and create fiscal revenue through the renewal of dilapidated buildings.

Real estate has long been a pillar industry in China, directly driving a quarter of GDP at its peak and contributing more than a third to local purses. The construction industry alone can generate employment for 50 million people.

In 2022, the total revenue of local governments related to real estate reached 8.61 trillion yuan, including 6.69 trillion yuan in state-owned land transfer fees and 1.92 trillion yuan in taxes from five real estate-specific taxes. The proportion of land transfer income and real estate-specific taxes in local fiscal revenue has continued to rise from 26% in 2014 to 36.7% in 2021. The two are so deeply tied together that they have long formed a community of shared destiny.

However, no industry can continue to grow rapidly. In recent years, the real estate industry has entered a period of deep adjustment.

In 2022, the national land transfer revenue began to decline, down 23.2% year-on-year, and continued to decline by 13.3% in 2023 and 6.7% in the first quarter of 2024. The national land transfer revenue will drop from 8.7 trillion yuan in 2021 to less than 5.8 trillion yuan in 2023. You know, this is the source of local available financial resources, financing, debt repayment, etc. The landlords' surplus grain is shrinking, which is not good for anyone.

Hubei has not been immune to the big wave. Looking at Hubei's state-owned land use rights transfer revenue, it was 230.7 billion in 2023, 245.2 billion in 2022, 344.4 billion in 2021, 290.7 billion in 2020, and 310.3 billion in 2019. Compared with the peak in 2021, 2023 was 33% less.

The game of land finance is coming to an end, and the renovation of dilapidated houses has become a new tool in the existing market to leverage the economy and fiscal and taxation.

Let's take Wuhan as an example. In 2020, Wuhan, with a permanent population of 12.44 million, had 6.03 million employees, of which 880,000 were employed in government agencies, public institutions, and state-owned enterprises, which means that one in every seven people worked in the system or in state-owned enterprises. Baosteel, Dongfeng Motor and other state-owned enterprises are typical representatives.

In this city where the state-owned economy accounts for a relatively large proportion, many unit dormitories that were once envied were built in history. Today, many of them have become dilapidated buildings.

For example, on No. 21 Street in Qingshan District, there are four brick-wood and brick-concrete tube buildings, including three residential buildings and one Wuhan Iron and Steel single dormitory building, with a total of 134 households. The three residential buildings are all over 50 years old, which is considered "overdue".

How to do it?

Not long ago, residents of the community and property rights units jointly initiated the establishment of a platform called "Residential Cooperative" and cooperated with development companies to achieve the "original demolition and original reconstruction" transformation of the community.

Wuhan has become the first place to take the lead in the pilot project of cooperative renovation of dilapidated houses in Hubei Province. In the near future, those tube-shaped buildings will disappear under the bulldozers and transform into modern high-rise residential buildings, greatly improving the living environment.

During the whole process, it will naturally drive the local upstream and downstream industries such as construction, decoration, and home appliance sales, and contribute to local fiscal revenue.

As the former director of the Wuhan Housing Security and Housing Management Bureau said, the Municipal Housing and Urban Renewal Bureau is a newly established department in this round of institutional reform. It undertakes important responsibilities such as housing security, municipal construction, and urban renewal. It is connected to people's livelihood on one end and economic and social development on the other.

Renaming the various parts of Hubei as Housing and Urban-Rural Development Bureaus is only the first step, and this small stone is bound to cause a thousand ripples.In the future, Beijing, Shanghai, Guangzhou, Shenzhen, Suzhou, Hangzhou, Chengdu and Chongqing may follow suit.

The logic of China's economy is quietly changing. We must be fully aware of the direction in which the tide is changing and adjust our expectations and action paths in a timely manner.

In the face of the tide of the times, no one can go downstream forever. What we can do is to find the correct direction again in the upstream and finally reach the other side.

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No.5892 Original first article | Author Wu Heng

Author profile: Master of Hong Kong University of Science and Technology, regional economic observer.

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