Today an estimated one million people are living in subterranean apartments in Beijing, where affordable housing near employment is scarce for the greater city’s 23 million inhabitants (Xing 2011). These units are often windowless subdivisions in basements and air raid shelters, and the median size is 9.75 square meters.

In August 2010, Beijing instituted a three-year plan to evacuate tenants from these underground dwellings. Evictions started taking place in 2011, particularly in the innermost urban districts with expensive land values, but demand remains high. In some areas of the city, particularly in the outer districts, conspicuous signs on the street advertise subterranean rentals, and the Internet lists thousands of units below street level as well.

This article draws on the author’s analysis of this phenomenon from 2012 to 2013, when online advertising for subterranean apartments was active and growing. These listings contain enough information on individual units—including location, price, size, amenities, and depth below ground—to assess the dynamics of this low-income rental housing submarket.

Shortage of Affordable Rental Housing

Like most Chinese cities, Beijing suffers an acute shortage of affordable rental housing, driven by the massive migration to urban centers (Liu et al. 2013; Xie and Zhou 2012). It also has a vast amount of subterranean space, resulting from a policy dating to 1950 that requires all new buildings to have common basements and air defense shelters. Construction codes specify building guidelines, including the provision of infrastructure such as electricity, water, and sewers. This supply of underground space has grown exponentially amid China’s extraordinary building boom in recent decades. Some complexes contain as many as 600 units below street level.

As a means of addressing the housing deficit, official policy for 24 years encouraged the “economic” utilization of this underground space during peacetime, and residential shelter was one of the sanctioned uses (BMBCAD 1986). But in 2010, Beijing stopped granting new use permits for underground apartments and instituted the aforementioned three-year plan to evacuate residents. Given the number of people involved and the lack of affordable housing alternatives, the process has posed challenges, including landlords who demand compensation for occupancy rights they had purchased when the units were legal.

State-Sponsored Housing

Since China transitioned to a private market from a centrally planned economy, wherein the state provided all housing, the real estate sector has grown explosively. Treated primarily as an investment vehicle, new private units are accessible only to those with enough savings to purchase a house with little financing.

Restrictions on land supply are another obstacle to the private provision of shelter. Because the state, which owns all land, is trying to protect fertile farmland, development is prohibited in rural areas on the urban periphery. Nevertheless, informal settlers have rapidly built out that landscape into housing projects. These “urban villages” provide private residences for 5 to 6 million low-income people who cannot afford to live closer to the city center, but the government has been trying to remove them by demolition.

The Chinese state provides four types of affordable housing projects, particularly for public employees with lower incomes (see table 1). The earliest types of assistance included the lian zu fang program, which provided rental housing to the poorest families, and jing ji shi yong fang, which provided subsidized homeownership opportunities.

The government launched a program in 2011 to construct more rental housing (gong zu fang) for recent college graduates and skilled workers in key sectors such as the high-tech industry. Given the relative newness of this program, though, the number of affordable rental units is still relatively small. Meanwhile, xian jia fang housing projects are targeted for the displaced. Despite the large number of units constructed for low-income residents over the years, demand far outstrips supply and wait lists are long.

The Hukou Barrier

Beijing hukou, or household registration permit, is a prerequisite for all four types of affordable housing. A holdover from central planning, hukou entitles households to public services in the place of residence assigned to them by the government, but restricts receipt of services in other locations. People born into hukou of large cities are eligible for better educational, health, and infrastructure services. Unless a state-sponsored employer requests a change of hukou for a worker, those without hukou in major cities still face a significant barrier to economic opportunity.

Figure 1 shows the current location of public housing programs for people with Beijing hukou. As in other places around the world, affordable housing projects are located in more remote parts of the city, as mentioned, where land is less costly but also less desirable. Also typical of affordable housing projects, subletting is reportedly widespread, with program recipients collecting rents for their publicly provided apartments.

Analyzing the Underground Market

Our study took advantage of the detailed listings for underground rentals available at Ganji.com, which were optimal for analysis because the site was well organized, with the greatest number of ads. Using the search term “地下室,” or “underground unit,” we captured the monthly rent, square meter area, specific location, amenities, and other descriptors of subterranean apartments, such as the depth below ground level. Of the 7,312 ads we collected from October 2012 through September 2013, we culled 3,677 unique listings with complete information. As figure 1 shows, these units are well distributed throughout the city, reflecting the requirement that all new buildings in Beijing include underground space.

It is important to mention that the ads represent what is likely the higher end of the underground housing market. Landlords who advertise online tend to be better educated, with more resources. The ads themselves usually feature photos, evincing the relatively high quality of the housing. Moreover, the landlords’ willingness to advertise suggests that they felt relatively secure about their tenure.

Table 2 provides descriptive statistics for the 3,677 subterranean housing units studied. The median size is 9.75 square meters, slightly smaller than Beijing’s 10-square-meter minimum and the overall average housing area per capita (28.8 square meters per person). Even so, the apartments are generally larger than the average worker dormitory housing, which is just 6.2 square meters (Xie and Zhou 2012).

The mean monthly rent of 436 RMB (US$70) confirms that the apartments are at the higher end of migrant housing. A 2012 government study found that about 48 percent of migrants in Beijing pay less than 300 RMB (US$48) per month, 27 percent pay 301 to 500 RMB (US$48–80), and 17 percent pay more than 1,000 RMB (US$160) (Xie and Zhou 2012). In other words, these underground rental units are generally a higher-valued type of shelter for migrants than the more common worker dormitories and urban village housing.

On average, subterranean units are less than 11 kilometers from the city center, with a standard deviation of 6.2 kilometers, placing them well within the 5th Ring Road. With these locational advantages, the apartments offer potentially lower commuting costs and better economic opportunities. Similarly, the average distance to the nearest subway station is a little over 1 kilometer, which is considered within walking distance.

Roughly 50 percent of the advertised units are one or two stories below street level. The other 50 percent are half underground, like so-called “garden apartments” in the United States, with a small window near the ceiling of the room. Our preliminary analysis found that whether a unit was one or two stories below ground did not make any statistical difference in price after holding for other variables. As for amenities, the ads for about one quarter of the units advertised the presence of heating, more than half mentioned Internet connectivity, about one quarter mentioned the presence of surveillance cameras, and less than one eighth mentioned the employment of security guards.

Analyzing Market Dynamics

Our study examined whether demand in this unusual subterranean housing submarket is similar to the conventional market above ground. In particular, the disadvantage of living below street level may be large, and this type of housing is generally so small that other standard variables in hedonic price models may be more pronounced or differ in some other way.

Our statistical analysis involved a step-wise progression of fitting test variables to a base model that includes the variables well established in the literature to be significant. It performed predictably with all the variables significant and in the expected direction. For example, rent increases around 3.3 percent for each square-meter increase in unit size, and 3.6 percent for every one-kilometer decrease in distance to the city center. Transportation access is also significant. Proximity to a subway station raises rent by 1.8 percent per kilometer; for each subway line station within an 800-meter radius of the unit, the rent increases by 2.8 percent.

Given that our hedonic price model performed like other models with the same major significant variables and in the same direction, the underground housing phenomenon is clearly a market. Its emergence suggests that there is strong demand for rental housing—especially among lower-income households—that neither the formal market nor public housing programs are satisfying. This is obvious, given that hukou policies do not allow migrants to apply for public housing programs and that even lower-income Beijingers with hukou have been known to live underground.

Our analysis suggests that the highest priority for the lower-income, often migrant population in Beijing is proximity to jobs and transportation. The central location of these units makes the trade-off of living underground worthwhile. Moreover, the comparison with public housing rents in table 1 indicates that while costs per square meter might be higher, the total rent for underground units is much lower (Hu and Hu 2012). The underground market is thus meeting the demand of people with incomes below the levels targeted by affordable housing programs.

Conclusions

Subterranean living is a sizable phenomenon in Beijing. Thousands of advertisements for underground apartments exist on the Internet, and that number was still growing in 2013 despite evictions. But the size of this submarket does not mean it should be incorporated into public policy.

There have been extraordinary accounts of people living on roofs and in sewer wells, trying to find a way to live in central Beijing. Reliance on underground housing is often just another desperate measure that the urban poor resort to in order to live and work in urban areas where they lack hukou and therefore cannot access services.

How much can a society minimize living space to make urban locations affordable? This question will become even more pressing as densities in Asian megacities exceed levels of acceptable human decency, forcing policymakers and designers to think more creatively about urban reforms. While underground units are in fact more spacious than dormitories for workers or students. China’s extraordinary economic development has raised its citizens’ aspirations and expectations for better housing conditions.

Given the fact that most of the renters are single or couples without children, and tenure is temporary, lasting no more than several years, housing policy should consider the need for lifecycle housing for people just starting out in this expensive city, or for those requiring temporary stays for health care, education, and other needs.

About the Author

Annette M. Kim, Ph.D., is associate professor at the Sol Price School of Public Policy at the University of Southern California. She is also the director of SLAB, the newly formed spatial analysis laboratory at Price that advances the visualization of the social sciences for public service through teaching, research, and public engagement.

References

BMBCAD (Beijing Municipal Bureau of Civil Air Defense). May 15, 1986. “关于改变结合民用建筑修建防空地下室规定的 通知》的实施细则” (Changes to the Implementation Rules on Constructing Air Defense Shelters by Combining with Civil Buildings).

Hu, Hai-feng and Ji-ya Hu. 2012. “Overall Evaluation and Future Development Planning of Beijing Affordable Housing System During the Eleventh Five-Year Plan.” Beijing Social Science 1: 7–14.

Liu, Xiang, Maojun Wang, Jiabin Cai, and Mengchen He. 2013. “An Analysis on the Spatial Structure of Non-Native Permanent Population of Beijing Metropolitan Area in 2000–2010.” Urban Development Studies 20(10): 86–93.

Xie, Xinmei and Le Zhou. 2012. “Study on Housing Demands of Migrant Workers in Key Industries in Beijing.” Paper read at China Urban Planning Annual Conference Proceedings, Beijing.

Xing, Fan. 2011. “北京清理地下空间提速 百万北漂可能无处寄居” (Beijing to Clean Up Underground Space Speed One Million North Drift May Have Nowhere to Sojourn). Beijing Times, January 14. http://news.qq.com/a/20110114/000529.htm

Governments have long recognized the need to preserve certain open space lands because of their importance in producing public goods and services such as food, fiber, recreation and natural hazard mitigation, or because they possess important geological or biological features.

New impetus for open space preservation results from the desire to counteract the effects of declining urban cores, suburban sprawl, and the socioeconomic and land use changes now encroaching on high-amenity rural areas. The growing use of habitat conservation plans for reconciling environmental and economic objectives also draws attention to the values of open space, especially in comparison to alternative land uses.

It is likely that most decisions about open space preservation will be made at the local level, due in part to the general trend of devolution of governmental responsibility (with accompanying fiscal responsibility), as well as an increase in the institutional capacity and activism of local land conservation trusts. Since local governments are heavily dependent on the property tax for operating revenue, the fiscal and economic implications of open space preservation decisions are paramount. Conservationists are frequently called upon to demonstrate to local communities the economic value of preserving open space.

While much has been written about the economic value of the environment in general and of open space in particular, the literature is segregated by discipline or methodology. It is therefore difficult to assess the economic value of open space comprehensively. It is even more difficult to apply what is known in a public policy context, where open space holds significant non-monetary value.

Concepts of Value and Public Goods

Like all natural ecosystems, open space provides a variety of functions that satisfy human needs. However, attempting to assign monetary values to these functions presents several challenges. First, open space typically provides several functions simultaneously. Second, different types of value are measured by different methodologies and expressed in different units. Converting to a standard unit (such as dollars) involves subjective judgments and is not always feasible. Third, values are often not additive, and “double counting” is an ever-present problem. Finally, some would argue that it is morally wrong to try to value something that is by definition invaluable. At a minimum, they say, open space will always possess intangible values that are above and beyond any calculation of monetary values.

Open space often plays an important role in the provision of “public goods.” Public goods are nonexcludable: once they are produced it is impossible or very costly to exclude anyone from using them. They are also nonconsumptive: one person’s enjoyment of the good does not diminish its availability for others. The limited ability of producers to exclude potential users typically precludes the development of market allocation systems for public goods. As a result, easily observed measures of value, like those expressed through market prices, do not exist. Yet land use and resource management decisions imply tradeoffs between marketed and non-marketed goods and services, making it difficult to compare relative values and, through tradeoffs, arrive at socially optimal decisions.

Use and Nonuse Values

Much of the economic value associated with open space activities like recreation can be examined as use value and nonuse value. Use value results from current use of the resource, including consumptive uses (i.e., hunting and fishing), nonconsumptive uses (i.e., hiking, camping, boating and nature photography) and indirect uses (i.e., reading books or watching televised programs about wildlife).

Activities directly or indirectly associated with open space may provide an important source of revenue for businesses and state and local governments. For example, hunting and fishing license fees are a major source of funding for state wildlife agencies. Less direct but perhaps more important from an overall economic perspective are expenditures related to nonconsumptive open space activities that also have income and job multiplier effects and often occur in rural areas with limited commercial potential.

The economic implications of use and nonuse values across society can be very large, and many economists agree that these values should be considered in open space decisionmaking. Measuring use and nonuse values is difficult, however, due to the lack of markets and market prices and the existence of administratively set, quasi-market prices such as hunting and fishing license fees. To arrive at socially meaningful estimates of value for many nonmarket resources, economists use the concept of consumer surplus, or the amount above actual market price that a buyer would theoretically be willing to pay to enjoy a good or service.

Two methods are used to first estimate the demand curve for the resource: contingent valuation or travel cost methods. In the first, a hypothetical market is created in a survey and respondents are asked what they would be willing to pay for some defined activity or resource. In the second, the cost of travel to a site is viewed as an entry or admission price, and a demand curve is derived from observing visitation from various origins with different travel costs. While still controversial, these methods have been used in numerous studies to estimate the willingness to pay in addition to actual expenses for various recreational activities ( see chart 1), as well as for nonuse values such as maintaining populations of certain endangered species or preserving unique bird habitats.

Several types of nonuse values consider the possibility for future use. Option value represents an individual’s willingness to pay to maintain the option of utilizing a resource in the future. Existence value represents an individual’s willingness to pay to ensure that some resource exists, which may be motivated by the desire to bequest the resource to future generations.

Measuring the Economic Value of Open Space

As a result of decreased intergovernmental transfers of financial aid and increasing citizen resistance to taxes, local officials now scrutinize the fiscal consequences of land use decisions more than ever before. The primary analytic tool available to policymakers for this purpose is fiscal impact analysis, a formal comparison of the public costs and revenues associated with growth within a particular local governmental unit. Fiscal impact analysis is utilized frequently in large communities experiencing growth pressures on the metropolitan fringe, and it is being applied to open space preservation.

A review of fiscal impact studies by Robert Burchell and David Listokin concludes that generally residential development does not pay its own way. They found that nonresidential development does pay for itself, but is a magnet for residential development, and that open space falls at the break-even point. A study of eleven towns by the Southern New England Forest Consortium shows that on a strictly financial basis the cost of providing public services is more than twice as high for residential development as for commercial development or open space. (see chart 2)

Care must be taken when evaluating the results of fiscal impact analyses for several reasons: the choices of methodology and assumptions greatly influence the findings; specific circumstances vary quite widely from community to community; and fiscal impact analyses do not address secondary or long-term impacts. Nevertheless, fiscal impact analysis is a powerful and increasingly sophisticated planning tool for making decisions about land use alternatives at the community level.

The most direct measure of the economic value of open space is its real estate market value: the cash price that an informed and willing buyer pays an informed and willing seller in an open and competitive market. In rural areas, where highest and best use of land (i.e., most profitable use) is as open space, one can examine market transactions. In urban or urbanizing regions, however, where highest and best use (as determined by the market) has usually been development, the open space value of land must be separated from its development value, especially when land is placed under a conservation easement.

Open space may also affect the surrounding land market, creating an enhancement value. Casual observers find evidence of enhancement value in real estate advertisements that feature proximity to open space amenities, and it is explicitly recognized by federal income tax law governing the valuation of conservation easements. A number of empirical studies have shown that proximity to preserved open space enhances property values, particularly if the open space is not intensively developed for recreation purposes and if it is carefully integrated with the neighborhood. Enhancement value is important to the local property tax base because it offsets the effects of open space, which is usually tax-exempt or taxed at a low rate.

Open space possesses natural system value when it provides direct benefits to human society through such processes as ground water storage, climate moderation, flood control, storm damage prevention, and air and water pollution abatement. It is possible to assign a monetary value to such benefits by calculating the cost of the damages that would result if the benefits were not provided, or if public expenditures were required to build infrastructure to replace the functions of the natural systems.

An example of this approach is the Charles River Basin in Massachusetts, where 8,500 acres of wetlands were acquired and preserved as a natural valley storage area for flood control for a cost of $10 million. An alternative proposal to construct dams and levees to accomplish the same goal would have cost $100 million. In another study, the Minnesota Department of Natural Resources calculated that the cost of replacing the natural floodwater storage function of wetlands would be $300 per acre foot.

Lands valued for open space are seldom idle, but rather are part of a working landscape vital to the production of goods and services that are valued and exchanged in markets. Often, the production value resulting from these lands is direct and readily measured, as is the case in crops from farms and orchards, animal products from pasture and grazing lands, and wood products from forests. The economic returns from production accrue directly to the landowner and often determine current and future land use alternatives.

Open space lands may also play a less direct but nonetheless important production role for market-valued goods that depend in part on functions provided by private lands. Examples are the role of privately owned wetlands in fish and shellfish production and the role of private lands in supplying habitat for wild game. In addition to providing market-valued goods and services, direct and indirect production from open space lands supports jobs that are valuable to local, regional and national economies.

Conclusions

It will never be possible to calculate completely the economic value of open space, nor should it be. Certain intangible values lose significance when attempts are made to quantify them. Indeed, to incorporate into the real estate market the public values of open space without also developing a means of capturing those values for the public benefit would be counterproductive for conservation purposes.

Land use decisions ranging from the allocation of scarce conservation budgets to the property rights debate will be better informed if there is a more comprehensive understanding of the economic value of open space. Methods for determining and comparing value vary widely in level of sophistication and reliability. Some are based on long-established professional standards, while others continue to evolve. Given the inherent subjectivity of the term, any discussion of value must include a variety of disciplines, methodologies and approaches. The greatest benefit may be in prompting reassessment of the “conventional wisdom” about the economic consequences of development and conservation.

Charles J. Fausold is a fellow at the Lincoln Institute of Land Policy. Robert J. Lilieholm is an associate professor at Utah State University and a former visiting fellow at the Lincoln Institute. With partial support from the Boston Foundation Fund for the Preservation of Wildlife and Natural Areas they are reviewing and synthesizing existing information to develop a useful framework for considering the economic value of open space.