Swiss Re：Enhancing the risk mitigation system for affordable residential housing in China

Christian Mumenthaler

Group Chief Executive Officer, Swiss Re

Abstract

In China, domestic migration remains heavily weighted in the direction of the economic opportunities that developed towns and cities present. Rapid urbanization continues, as does demand for housing. However, supply does not meet demand. The prices of commercial houses in Tier-1 cities have increased rapidly since the mid-2000s, and the rental market is underdeveloped. To address the widening gap, the “14th Five-Year Plan” calls for increasing the supply of affordable rental housing. In June 2021, the State Council issued a Guideline to Accelerate Development of Affordable Rental Housing, promoting the development of affordable rental housing (ie, the supply of small-sized, low rent living units) with policy support in Tier 1 cities, to cater demand for recent arrivals to the cities and young people. Since 2021, the local governments and authorities have issued construction plans for rental housing developments. At least 40% of new apartments in Tier 1 cities in 2021-2025 are expected to be for affordable rental housing.

The development of affordable rental housing is important for the sustainable development of the real estate market in China. Risks to property include loss or damage due to natural catastrophes, fire events or other accidents. Affordable rental housing is typically more densely populated than privately-owned housing given the small-size the rental units, which also have high rates of tenant turnover and as a result can suffer rapid value depreciation. According ownership rules, residents normally bear the risk for their own property in their rental units; the property owner or operator, meanwhile, is typically responsible for building structure risks and damage in common areas. And, in the case of an extreme disaster event (natural or man-made), the government supports victims. Since people living in affordable rental housing are new arrivals to a city, typically young and with relatively lower wealth, they are more financially vulnerable to external shocks. Most affordable rental housing is still under construction or is only recently inhabited and as such, has not experienced losses arising from building ageing.

At present, the level of risk protection for domestic housing in China is relatively low compared with other markets. For example, in Singapore’s public housing system, the government mandates that residents buy mortgage insurance and fire insurance, encourages them to purchase other types of housing insurance and also establishes a platform to share risk knowledge and information about protection solution. On account of joint efforts by the government and private sector, residents in Singapore are well protected.

We see an imminent need for a strong risk management mechanism to manage the growth in risk faced by multiple stakeholders in China. By taking insights from best practice in other markets, we suggest China improve the residential housing risk management by integrating insurance into the social governance system. In the medium-to-long term, a sound, multi-level housing risk protection system will help improve social security and economic resilience.

Suggestion 1: Enhance legal guidance and policy support with regulatory measures to establish a well-structured risk management system for residential housing.

Suggestion 2: Leverage existing financial funds, and enhance residents’ awareness of housing insurance protection services and solutions.

Suggestion 3: Explore public-private partnership (PPP) models, deepen use of digitalised technology-driven tools, and actively promote inclusive housing insurance products.

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Swiss Re：Enhancing the risk mitigation system for affordable residential housing in China