Housing market faces division

House rents have increased significantly in major cities in the past year, which has seriously affected people's livelihood and deserve more attention in the ongoing Two Sessions.

National Bureau of Statistics data show rents in January 2014 increased 4.6 percent year-on-year, and demand for rental housing increased in Beijing, Shanghai, Shenzhen and Guangzhou (the latter two in Guangdong province) after Spring Festival.

According to Soufang, a real estate information portal, the average rent for 11 cities, including Beijing and Shanghai, was 2,742 yuan ($446) a month in January, an annual increase of 5.37 percent, much higher than the increase in the consumer price index.

But despite the buoyant demand for rented homes, some experts fear that the housing market bubble will soon burst. In fact, housing prices have already dropped in some places. For example, angry homebuyers smashed the sales office of a housing project in Hangzhou, Zhejiang province, because housing prices dropped after their purchase.

The two trends may seem contradictory but are related, indicating that the housing market is undergoing bifurcation-geographically between first-tier and third-or fourth-tier cities, as well as sector-wise between owner-occupied and rental housing markets.

The geographical bifurcation can be attributed to uneven urbanization. Urbanization in China is not only about rural to urban migration but also relocation of the workforce from less developed regions to the coastal region and from small towns to metropolises. The economies of first-tier cities are being upgraded through economic restructuring with greater policy advantage and stronger agglomeration effect-or, as American economist Edward Glaeser says, "triumph of the city".

Public services and amenities are concentrated at the top of the urban hierarchy, leading to greater concentration of population in cities such as Beijing and Shanghai. Long-term residents in these two cities have increased at an annual average rate of 600,000, with media reports saying that more than half of the students in many Shanghai schools are children of migrants.

In contrast, low-paying jobs in manufacturing in third- and fourth-tier cities are not conducive to any increase in housing prices. Housing markets in these cities are not driven by their economic productivity but by capital flow.

The housing markets in these cities grew because of an expansionist fiscal policy. Capital investment, especially the central government's 4-trillion-yuan stimulus package in 2008, greatly inflated asset prices. Since many small and medium-sized enterprises faced difficulties during the global financial crisis, capital was injected into large, and in many cases inefficient, State-owned enterprises. Many projects were developed swiftly without proper feasibility studies, and capital flowed into the real estate sector because of market constraints. And the difficulty to get land in first-tier cities prompted many developers to shift to third- and fourth-tier cities. Despite that, the housing market in these cities is quite constrained.