The trump card to rein in the runaway house rent

The latest fiasco of a house renting agency exposed the dodgy behavior of property agencies who want to make quick money from the boom of the long-term rental market by cashing in upon favorable industrial policies. Apart from market forces, the trump card for the government in curbing the runaway rental prices would be establishing a long-term mechanism by reforming land, tax, fiscal and financial apparatus so that the land and housing prices can be lowered.

Photo: Nora Tam

A property agency halts its operation in the eastern coastal city of Hangzhou, putting thousands of house owners and tenants in jeopardy as the intermediary fails to pay the owners rents and the tenants are faced with the risk of being evicted. Worse still, many of the tenants have put down a deposit with the agency and pay their rents in installments by taking credit from a third-party financing vehicle. Although being forced by their owners to evacuate from the rented houses, they couldn't take back their deposit and still need to pay back the remaining installments to the third party. The latest fiasco exposed the dodgy behavior of those agencies who want to make quick money from the boom of the long-term rental apartments by cashing in upon favorable industrial policies.

In the past, the property agency used to only provide information service to match would-be tenants with their desired houses while charging a one-time service fee. The tenant paid the rent directly to the landlord. Whereas, in the long-term rental apartment model, the third-party agency becomes the tenant of the house by directly signing a long-term rental contract with the owner, then they will sublet the house to the sub-tenant. The rent is first collected by the agency from the sub-tenant before paying to the lessee. As there is a time lag existing in between, a pool of funds is formed, tempting those agencies to misappropriate the funds which may help speed up their expansion by taking more apartments from the market, maximize return of the funds, while unfairly incurring risks to sub-tenants and house owners.

This new approach is essentially a Ponzi scheme transplanted in the rental market. As soon as the tenants enter into a rent contract with a financing company, the agency will immediately receive an amount equal to the rent for the whole year from the lender.  However, the agency will only make quarterly payment to the owner of the house, with the rest of the year-long rent at their disposal. With the extra money they obtained from each tenant, they can further use it to rent houses from 3 more landlords down the line, with more tenants taking on the loans, they can continue to relish funding from the lender, the process will replicate itself relentlessly until it expands into every corner of the market. This may account for the frenzied competition among those agencies to grab more houses from the market, pushing the rental prices up significantly. The conundrum of the issue is by the time there is no more house to rent, the cash flow will rupture with huge repercussions for social stability.

Yan Yuejin, research director of the Yiju Research Center, a think tank specializing in real estate, believes that there are three risks plaguing the long-term rental market. First, the illegal use of tenant credit. The tenants seem to pay rent every month, but in fact they are paying back loans to a third-party lender. Even if the cash flow is disrupted and the property agency can't pay rent to the owner, the tenants are still obliged to pay the rest of the loans after being evicted by the owner. Second, misappropriation of the rent. The rent may be used to acquire houses or for other purposes, leading to many uncertainties and violating the law which requires the rent shall only be used for payment to the landlord. Third, management of those property agencies are often engaged in internal wrangling and haggling.   

According to an industrial insider in Beijing, the property agency has shifted their business model from providing intermediary service to deliver added value. When you want to make profit from added value, a variety of high quality services will be in demand to widen profit margins. Take Ziroom - the market leader for example, the company refurbishes their rented house in different styles to pander to the modern taste of the white collars, and provide relevant property services such as repair, cleaning etc. Despite this, the company still struggles to make money. Xiong Lin, CEO of Ziroom told reporter that so far, the company is in the initial phase of market expansion with not much regard for profitability. He is sanguine about long term prospect as more and more house owners rent their houses to Ziroom, the desired magnitude will be achieved.

With such companies and huge amount of capitals keen on tapping into the market, they expect to expand their market share even if they do not make money in the short term, once they have gained dominance of the market, an oligopoly will be formed. This will not bode well for the future market in which without effective regulations, excess monopoly profit will be generated from outrageous rental prices.

To address the issue, first is to increase the supply of medium- and low-end houses to ensure that low-income people can rent subsidized housing such as low-rent housing and public rental housing and provide certain rental subsidies for low- and middle-income people to ease their burden. Second is to improve the regulatory system and supervision of the rental market to ensure its healthy development by formulating market rules and supervisory mechanism to foster a benign competitive environment in which diverse market players could co-exist and monopoly would be effectively eliminated. Last but most important is to establish a long-term mechanism by reforming land, tax, fiscal and financial apparatus so that the land and housing prices can be lowered, which in turn will give more room for long-term rental apartment suppliers to survive. That would be the trump card in curbing the runaway rental prices and ensuring sustainable development of the market.

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