No need to establish housing policy bank

Recently, some reports said, the Ministry of Housing and Urban-Rural Development has proposed establishing a policy bank on the basis of Housing Fund Management Centers. Why such a special bank to build affordable homes should be established?

Under the central government's plan, 36 million units of subsidized housing are to be built before the end of 2015. Another 10 million units are to be built by renovating shantytowns before the end of 2017. Although the original intention is quite good, the government has not enough money to cover them. Roughly estimated, it will cost the government about ￥500 million, it almost equals to 25% of the fiscal revenue in 2013. However, at present stage in the housing funds system, there is too much money to be accumulated. Then, here comes the proposal of creating a policy bank to provide homes for low- and middle-income families, which also embodies the aim of the current housing fund system.

The designing defect of housing fund

At the very beginning, the housing fund is only used to buying, building, rebuilding and maintaining houses for workers themselves. Urban residents must pay a portion of their income into Public Housing Fund to be eligible for low-interest loans, while their employers also contribute. The system itself is designed to form a money pool for mutual aid during house buying process.

Actually, in reality the policy is not as same as its original intention. For the most workers, house prices are so high that they are unable to buy, or even unable to pay for the down payment. In fact, only those who are rich or with high income can buy houses, and enjoy the lower interest rate by loans from housing funds.

Furthermore, there are some unreasonable phenomena in carrying the policy in recently years. In the urban cities like Shanghai, Beijing and other medium sized cities, local governments have introduced housing purchase restrictions policy, but at the same time the law going ahead forced them to hand in housing provident fund. Actually, those who paid in the housing provident fund, have no right to buy houses according to the policy even if they have enough money, because the most of them can’t get the Hukou of the city they live in. So under the housing fund system, immigrant residents give subsidies to the local residents.

With the large number of idle funds in present housing fund system, it signals the failure of the policy itself. Therefore, we need to re-examine the housing fund system, to some extent, giving personal income tax deduction when people buy their first house is a better alternative policy.

Housing policy bank violates the interests of the fund payers

However, the Ministry of Housing and Urban-Rural Development is not trying to reform in this direction. They hope to use the idle money in the housing fund system to launch more affordable housing constructions. As affordable houses in China, the most of them are public rental housing, and the rental price is always the same as those in the markets. So eligible applicants prefer to find house in the market rather than apply for public rental housing through tedious process.

From another angle, if the housing policy bank will serve as a for-profit institution, it can easily ask the commercial banks to do. After years of institutional reform and market competition, commercial banks in China are already quite efficient. If the bank is non-profit and takes efforts to let low-income groups can affordably rent house. So why let those people pay a portion of their income into the housing fund? Once they are forced to pay, they give subsidies to the riches.

Housing policy bank will result in financial market segmentation

It is not only in China, but in the U.S. as well, all of us fully agreed the home ownership scheme is a beautiful wish. In the United States, owning a house is even regarded as a part of ‘American Dream’. Even, American Dream Commitment Fund was established to narrow the gap between the dream and reality to having a house. However, the cruel reality is that only the rich or capable people can buy house. For the government, it should ensure residents not live on the streets. And this is always the minimum requirements of housing voucher type subsidies to those disadvantaged groups.

Blind commitment of giving welfare to the public is unsustainable. Even in the United States, whose GDP per capita is over ten times bigger than that of China, the efforts to promote the policy of making more residents have their own houses finally led to the subprime crisis. And Fannie Mae and Freddie Mac that with government credit support should take some responsibility for the crisis.

The planning housing policy bank in China is much defective than Fannie Mae or Freddie Mac. Firstly, Fannie Mae and Freddie Mac did not issue loans to developers. However, housing policy bank in China will focus on giving credit to developers. Considering the low profit and high risk of affordable housing projects in many cities, such loans to developers are always in great danger.

Secondly, Fannie Mae and Freddie Mac only buy housing mortgage loan packages of commercial bank, which could encourage the commercial banks to issue mortgage loans to house buyers. By doing so, commercial banks play their advantages to judge the credit of any house buyer, then the mortgage market will not be distorted.

But in China, housing policy bank might directly issue mortgage loans to individuals like today’s Housing Fund Management Centers. How could it take the operational risk when it can absorb public deposits?

Moreover, it will be a great hit to the undertaking market-oriented reforms of interest rates if such bank was established. The purpose of housing fund loans is to safeguard the interests of low-income groups. The loan interest rates for developers and house buyers are comparatively lower than that of commercial banks. In this point, the more successful the housing policy bank is, the more divided China’s financial market becomes.

So far in Chinese financial system there is an un-measurable and no bottom gap between the capital market and credit market. The policymakers of high ranking in Chinese financial system tried their best to cope with the abovementioned problems, but all their efforts were in vain. This is also the fundamental and major reason why the general market risk in Chinese financial system was caused.

So at present, there’s no need to establish a policy bank in the name of improving livelihoods.