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More Data Points on China Real Estate

July 23, 2010

I’ve come across some more useful data points on China’s real estate market, which I figured I would share.    

The first comes from a report by the South China Morning Post just over a week ago (you can access the article here).  An economist from the Chinese Academy of Social Sciences, using data from electricity meter readings, estimates that there are 64.5 million apartments and houses lying purchased but vacant in urban China.  Just to give some perspective, that’s approximately five times the excess housing inventory in the United States (although to be fair, China has a population just over four times that of the U.S., so proportionally, the overhang is roughly similar).  It’s worth noting that these findings were originally published in an essay in the overseas edition of People’s Daily, the official Communist Party newspaper.  “The problem now,” concluded the researcher, Yi Xianrong, “is that investment in the domestic property market has completely overturned China’s traditional concepts of wealth management.”    

The second batch of data comes from a paper published this month by three economists from the National Bureau of Economic Research (NBER) in the U.S., analyzing conditions in major Chinese housing markets.  I highly recommend checking out the pdf of their entire report here.  It’s chock-full of interesting data.  Some of their most important conclusions involve the relative price of renting versus owning (and therefore the expected yields, cash or implied, to be obtained from housing investment):   

Price-to-rent ratios in Beijing and seven other large markets across the country have increased from 30% to 70% since the beginning of 2007. Current price-to-rent ratios imply very low user costs of no more than 2%-3% of house value. Very high expected capital gains appear necessary to justify such low user costs of owning. Our calculations suggest that even modest declines in expected appreciation would lead to large price declines of over 40% in markets such as Beijing, absent offsetting rent increases or other countervailing factors.     

Their other conclusions involve skyrocketing land prices and the role of state-sponsored investment in propelling them skyward:   

Real, constant quality land values have increased by nearly 800% since the first quarter of 2003, with half that rise occurring over the past two years … Beijing’s land prices nearly tripled since the end of 2007 … State-owned enterprises controlled by the central government have played an important role in this increase, as our analysis shows they paid 27% more than other bidders for an otherwise equivalent land parcel.   

The authors observe that:

The magnitude of the increase in land values over the past 2-3 years in particular in Beijing is unprecedented to our knowledge … rent and price-to-income ratios since 2008 in Beijing and many of the other large coastal markets look to be very difficult to explain fundamentally.  

Some other data points the researchers presented that caught my attention include the following:   

  • Real housing prices increased by about 225% over the past decade, with just over 60% (or about 140 percentage points) of that rise occurring since the first quarter of 2007 (this is roughly consistent with the word-of-mouth assessment I’ve heard in several markets, that prices have doubled in the past two years). 
  • The trend has been, if anything, accelerating.  Real prices rose a record 41% (annualized) in the first quarter of 2010.
  • Price increases do not appear to be driven by any shortage in housing.  In five of the eight large Chinese markets they studied, the net new number of housing units provided since 1999 is at least as large as the net increase in the number of households.  Even in Beijing, Hangzhou, and Shenzhen, where there was some unmet growth in demand, the relatively modest gap does not explain the dramatic rise in home prices that has occurred.
  • During last year’s lending boom, real estate lending matched or exceeded the pace of overall lending.  From the start of 2009 to the end of 1Q2010, the total balance of loans outstanding grew by 40%.  The balance of residential mortgages grew by 38% and loans to real estate developers grew by 50%.
  • Revenue from land sales is local government’s most important off-budget income source, accounting for roughly 1/3 of all revenues.  In 2009, land sales brought in RMB 1.6 trillion, compared to RMB 3.3 trillion in budgetary income.
  • To get an idea of its overall economic signficance, the private housing sector accounts for over a third of the buildings built by the construction industry, which itself constitutes 5.7% of Chinese GDP, employs 14.3% of all workers in urban areas, and consumes about 40% of all steel and lumber produced in China (keep in mind that the study focuses only on housing, and that I’ve maintained there is also overbuilding in the commercial real estate sector).

All of which, I would argue, is consistent with my prior writings and media comments on the subject, which you can explore here.  A good starting point is my article, “China’s Real Estate Riddle,” which appeared last June in the Far Eastern Economic Review.

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5 Comments leave one →
  1. July 23, 2010 11:33 pm

    I have no doubt that Chinese property prices are in a bubble. But, if it were, it will be the first bubble identified by authorities/economists/NBER. Pardon my tongue in cheek comment, but I prefer bubbles where the dissenters are few and far between. I have no vested interest either way, whether it is a bubble or not. Perhaps, the day to short will be when you capitulate, or when NBER revises its study and says that China was different. That would be the sign – when consensus (and especially the experts) agrees that there is no bubble. Note, I’m not denying the presence of a bubble, but I’m wondering about timing. For now, any correction is to be bought.

    • prchovanec permalink*
      July 24, 2010 12:17 am

      A true contrarian speaks!

  2. Thomas permalink
    July 24, 2010 4:30 pm

    I have bookmarked your blog. It is where I can gain understanding of China’s economy from someone who has an insider view of China. I hope to know where I stand in between Jim Rogers and Chanos.

  3. Leon permalink
    July 27, 2010 2:38 am

    Before you make a hasty conclusion that there is a property bubble in China, you should consider that 1) gray income in the recent years have picked up speed, now accounting for 50% of total or 100% of reported income for the top 20% of households in China; 2) the 64.5m vacant homes rumor was started by a bloger in China and it is simply not possible b/c A) there is no way to check as the smart grid is not built in China, 2) 64.5m flat with average of 90sqm of size totals 5,800m sqm of empty residential living space, China sold a total of 4,261m sqm of residential living space in the past 10 years. so, there is more empty apts than the total housing stocks?! hm… Prof, I think you should do some math and thinking before posting this kind of hasty blogs….

    • charles permalink
      August 6, 2010 9:15 am

      @Leon
      regarding 1) : How much of this fabled “gray” income is speculation income ? Especially speculation on property, or bribes from the property business ?
      regarding 2) It doesn’t come from some “bloger in China”, but from Yi Xianrong, an economist at the Chinese Academy of Social Sciences, relayed by the South China Morning Post. If electricity companies needed a smart grid to charge customer and balance electricity production and consumption, we would still live in the dark.
      regarding 3) (that you call 2…) You are confusing total housing stock and the flow of sales. It is not the same thing. There is always a stock of vacant properties, even in a healthy market, so the stock of vacant properties wasn’t zero 10 years ago.

      hasty indeed…

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