More Data Points on China Real Estate
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 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.