China Housing Market (Boom or Bust)

[xero90]

China property: to burst, or not to burst?
April 28, 2011 8:28 am by Josh Noble

http://blogs.ft.com/beyond-brics/2011/04/28/china-property-to-burst-or-not-to-burst/

Among the captivating figures released in China’s 2010 census is a nifty little stat: Chinese urbanites went up from 36 per cent of the population in 2000, to a hair’s-breadth short of 50 per cent in 2010. It’s pretty safe to assume, then, that by the end 0f 2011 there will be more Chinese living in cities than in the countryside.

Neat timing, therefore, for a fresh report on whether China is experiencing a property bubble in its major cities.

Commerzbank’s Ashley Davies takes many of the China bubble arguments head on.

“There are too many empty houses” – no, he says. While estimates vary, a commonly used figure of 64m empty homes equates to 4.8 vacant homes per hundred people. In the US, that figure is 5.9 per 100.

“Chinese properties are expensive” – yes, he says, but not too expensive. House price to income ratios in some parts of China are dizzying – take Beijing, where Commerzbank says it’s 38 times average annual incomes. But in other cities, like Shenyang, the figure is still around 10 – i.e. somewhere in between Frankfurt (5) and New York (12), but less than Taipei (20) and Singapore (18). If wages rise quickly enough, some of these ratios will fall back to more comfortable levels.

More importantly, prices haven’t hit Japanese levels. In the 1980s, Tokyo office space went for as much as $250,000 a square metre. In Beijing, that figure is currently just $4,100 – a third that of Singapore. What’s more, people have been discussing a potential property bubble in China for years – in Japan nobody saw it coming. (Which raises the question – does a bubble only exist if you can’t see it?).

“There’s too much investment in residential construction” – not necessarily, he says. While housing investment as a percentage of GDP is 8 per cent – more than it was at the peak in Japan – there’s no historical evidence of how much is too much. China builds poor quality buildings that will need replacing relatively quickly. Combined with high urbanisation rates, this means a high level of residential investment can be sustained for a long time in China.

Davies admits that the finances of local governments – which have sold land in order to generate revenue – are a concern. They have relied heavily on the housing boom, and a turn in the market would damage their ability to meet payments.

The impending slowdown of the Chinese economy will also put the question of a property bubble - and what it means for the banking system – in sharper focus. Meanwhile the (mooted) opening of the Chinese capital account could result in huge outflows of capital as wealthy Chinese sell mainland assets to buy up property, stocks etc overseas.

In conclusion:

In our view the property market is guilty of exuberance but does not yet constitute a true bubble. Hence, the rationale policy response is to proceed with capital account liberalisation while keeping an iron grip on the property market. This seems to be exactly the approach being attempted by the authorities.

But one thing that sticks out is this chart, showing residential investment against fixed asset investment over the past 7 years.

It makes you wonder – while there may not be a housing investment bubble in China – might there be an investment bubble in something else? (Airports, train stations, shopping malls…)