The bifurcation between owner-occupied and rental housing markets means the investment in the former is mainly for asset appreciation. Rental yields are low, and the "buy-to-let" phenomenon is neither common nor the driver for housing development in China. The housing market has actually been driven by capital liquidity and monetary expansion; it is quite sensitive to the capital market. The development of the housing market in smaller cities was detached from demand, which led to houses lying vacant in some new districts or "ghost cities".

But a different possibility is being noticed in the capital market since June 2013. With the tapering of quantitative easing in the United States, capital began to flow out of emerging markets. Although the central bank has intervened to plug this flow from China, continuing the monetary expansion is now impossible. The introduction of Internet financial product, such as Alibaba's online fund Yu'ebao, attracted savings from banks and introduced some degree of market rate into the financial system, and banks became prudent because of the risks in the housing market. Thus began the deflation of the housing bubble.

The increase in rents reflects substantial demand for housing in first-tier cities where productivity is relatively high, as is the population. According to the NBS, housing prices in Shanghai increased 20.8 percent in the first month of this year compared with January 2013.The rent increase because most of the newcomers to Shanghai (and Beijing) cannot afford to buy a house and have to stay in rented homes.

The supply of rental housing, however, is faltering because demolition of houses in old areas and "urban villages" has reduced the number of affordable rented homes and homebuyers are more interested in asset appreciation than renting their property. The increase in rents, therefore, can be regarded as a market adjustment to low rental yields, although it has hurt the interests of the low-income groups.

Should the government emulate the examples of developed market economies to protect tenant rights? Given property owners' unwillingness to rent out their houses and the high vacancy rate of owned homes, the good intention may not help make housing affordable. So instead of speeding up demolition of houses and building large-scale housing units, often in inconvenient places, a more sensible approach would be to recognize the role of the informal housing market and regularize the rental procedure to protect tenants and landlords both. There is a possibility, though, that the housing market downturn may slow down housing demolition.

When the market recedes in developed economies, apartments in places difficult to access become the most vulnerable assets for investment, while mainstream detached houses in easily accessible areas keep their values. Hence, China's housing market may see bifurcation from now on. The question is: Is it possible to offer vacant houses on rent instead of building large-scale affordable housing, because homeowners under heavy debt can use the incomes from rents to ease some of their debt burden.

Fulong Wu is Bartlett Professor of Planning at University College London, and Yuemin Ning is director of the Centre for Modern Chinese City Studies, East China Normal University, Shanghai.

(China Daily 03/12/2014 page10)