China Real Estate: Bubble, What Bubble?
Tim Iacano of Iacano Research and the Bad Macro Blog has a post up on the China Stock Block saying China is not in the midst of a housing bubble. Entiitled,"The Economist Says There's No Housing Bubble in China," the post is based on a recent article in the Economist, entitled, "Home truths: Talk of a housing bubble in China and other parts of East Asia is much exaggerated."
The post notes that average house prices fell by 20-50% in real terms in most East Asian countries between the crash of 1997 and 2003. China, on the other hand, escaped relatively lightly in 1997-98, but a crash in China's housing market today would have a severe impact:
But today a collapse in house prices could have nasty consequences -- more severe than a bursting of its stockmarket bubble. That is because 80% of China's urban households now own their home (in America, the national figure is 69%), compared with only around 10% owning shares. It is fortunate, therefore, that for all the talk about a housing bubble, by most measures it does not exist.
But the numbers indicate no crash is imminent. Housing prices in China have risen 30% since 2002, as compared to 46% in the United States during that same period. China has had pockets where large price increases have been the norm, but even that must be viewed in relation to its GDP growth rate:
Admittedly, prices in Shanghai have almost doubled. At the peak of the boom in 2004, the prices of luxury apartments in Shanghai were rising at an annual rate of 50%, but the government has since successfully cooled the market with a capital-gains tax on homes resold within five years and an increase in minimum down payments. In a developed economy, double-digit annual price gains would indeed look bubbly, but not in an economy where nominal GDP is growing at a rate of 14%.
The post goes on to posit that "studies show that in the long term the main driver of house prices is income" Though the "ratio of average house prices to average incomes is currently flashing red in America, Britain, Spain and quite a few other developed countries where it has soared to record highs -- i.e., above levels that preceded previous crashes," it is not flashing red in China. These graphs from the Economist article bear this out:
What do you think?
Comments (19)
Read through and enter the discussion by using the form at the endDavid Yu - July 21, 2007 11:03 AM
Hey Dan, can you clarify something a little bit? Are these studies focused only on the urban cities or the country overall? I'd imagine for different countries the non-urban parts have different "buffering" effects on these figures, assuming they're based on the overall market. What I mean is - if the non-urban market is a larger percentage of the overall market for one country ( which I imagine is the case with the U.S. compared to China, but I may be wrong), the overall figures may under-emphasize the changes within the urban markets.
Tony - July 21, 2007 11:03 AM
The first thing to remember is that "All real estate is local". It is rare for an entire country to have a housing bubble. Even now, when the US has pretty close to a national housing bubble, not all areas are in a bubble, and some areas are much worse (LA & SF in California (especially the exurbs), southern Florida, Arizona).
At least they are looking at some decent metrics - like price to income; the typical "reasonable" figure for the US is about 3:1, and maybe 5:1 for high cost areas (now about 10:1 for SF). Another way is to compare the cost of buying a house to renting it; for example, in SF, the cost of renting is about 50% less than buying.
But, it's still hard. What number do you use for house price? In the US, median house price is most widely used, but it isn't accurate at times like now, with falling sales (lower by >25%, due to the bottom dropping out) and rising median. Chinese tend to use price per square meter, which is better, but ignores factors like location (e.g. compare Palo Alto to East Palo Alto, or its Chinese equivalent).
What numbers do you use for income? Per capita isn't the way to go - it can be skewed by the people at the top. Median per family is probably the best.
Another item to look at is investor demand. If it's high, that's another bubble indicator (investor demand in the most bubbalicious areas of the US was 20-30%).
Finally, certain types of real estate can be in bubble territory (e.g. luxury condos, commercial office, commercial industrial) and not others.
Anyway, the real question should be "Is Beijing/Shanghai/Chengdu/Wuxi/___ in a real estate bubble", not "Is China in a real estate bubble.". I suspect the answer is yes for at least certain types of real estate in Shanghai and Beijing (partly based on Chinese TV ads in the US about investing in Chinese real estate), but I'm not positive.
atc - July 21, 2007 2:06 PM
It's all about money supply and money flow. Money is flowing into China, so hard tangible assets will rise. It's pretty simple. As for America, money didn't flow into America, but America just printed alot of it based on credit. So I would worry more about America than China. That's why I made the move from selling my assets in America and locking it into an economy that is growing. (Not to mention the 6% I gained on Yuan appreciation, buying property was one of the only ways to convert a big money fast.) So all who sold the american market in the past year captured the froth/inflated money and ran.
I'm happy with my Shanghai "Luxury" apartment in Lu jia zui. After holding it a year, units on lower floors (mine is on the 34th) are selling at an 80% premium.
Also, when compared to hong kong and tokyo, shanghai is a steal. Lock into good locations because of the scarcity (in property, land is unique if it has special characteristics). China will build 10 more new marinas by 2010 and will clean up the huangpu river. Like all developed areas of the world, places near the water are always worth more.
atc - July 21, 2007 5:18 PM
once again, location, supply demand, upgraded granite countertops, flower in the front porch are all factors to consider. But none of them have such impact as the macroeconomic factor of money supply. for supply and demand, its not like people dont have housing over their heads currently, for granite counter tops, even the worst fixer upper has doubled in most areas of the US, and location, yes its a factor but when the market is rising, even the most useless piece of land next to the gutter is reconsidered or developed. often the worst location becomes the most expensive because it gets sold last in a rising market. Its all about money supply. That's why you see a world trend of rising prices. We are suffering from world inflation folks. Its not localized, its a phenomena occurring all over the world, uk, australia, new zealand, canada, india, Taiwan (can't get any worse, new president is on the way), etc. America is printing alot of money, and creating trillions in debt, and it will reflect in hard assets. The rest are just minute factors to consider once in a while and icing on the cake if you're going to jump in yourself. That is why once US raises rates, money supply is gone, homes drop, subprime fails. With china, people have CASH, but i wouldn't be surprised to see some heads chopped off especially those who have multiple homes, but now its unlikely because money supply has been flowing to the stock market to balance things alittle.
David Oliver - July 21, 2007 6:19 PM
I read the Economist article and also agree that it gives a distorted picture of the real estate market compared to looking at places like Beijing or Shenzhen. In Shenzhen where we were living prices surged around 50% over a 3-month period earlier this year (my friend just sold her apartment there but is now discovering that its not very easy getting RMB out of China).
The fact that many apartment buildings in the major cities are full of vacant apartments that the landlords have no interest in renting because they are expecting large capital gains tells me that the market is badly distorted and will have to come back down eventually.
My friends in the property business say to wait until after the Olympics to buy.
Romain Guerel (French working in Beijing) - July 21, 2007 7:58 PM
I am rather skeptical on the figures mentioned. 14% China Economic Growth? Housing price increase lower than in the US? I would agree than there is no bubble because: 1/ demand for housing is higher than supply; 2/ To own a house is a security for your retirement in Chinese eyes, so they will keep buying until pension fund system is adequate; 3/ Annual average income is still rising, so most Chinese families want to move from their shabby houses to more modern apartments; 4/ Even is interest rates are higher, relatives help to fund housing for daugther and son; 5/ There are less women than men by 30 million. In China, you need to have a house if you want to marry a women. Men and their relatives will not look too much at prices when they buy. haha! Why did I marry a Chinese woman?
Law Office of Todd L. Platek - July 21, 2007 9:18 PM
Romain,
Would like to know your answer to your own question (i.e. why did you?).
nanheyangrouchuan - July 21, 2007 11:55 PM
Shanghai and Beijing have notoriously high condo prices in buildings with only a few occupied units.
But beyond that, there is something fishy going on in the global real estate market because there is condo construction everywhere but most of the buyers are not residents but investors. And in an over saturated market like Miami, you have to go the state gov't for insurance because all of the major private insurers have pulled up stakes after their actuarials showed upper management the numbers regarding hurricane risk, sea level rise projections, land subsidence due to aquifer depletion and a general shortage of potable water.
Same goes for Dubai and Australia.
PaulW - July 22, 2007 12:08 AM
"1/ demand for housing is higher than supply"
At least that is what most Chinese believe, but if it was true - how come so many buildings are nearly pitch black at night?
Chinese build quality scares me. Buildings deteriorate in no time. I would never consider moving into an apartment older than 5 years.
Steven - July 22, 2007 1:24 AM
Tony, you are spot on!
To me the whole thing is like a food chain.The goverment controls the land and get the bigger part of the profit.Although the demand is there but the 'middle profit' is too out of propotion that it could be interpeted as bubble,for it could not be sustained and would crush the demand in the end.
atc - July 22, 2007 1:14 PM
because chinese women are more dependent and adorable? They know how to work your heart while they still have the youth to do it. they may be materialistic, but its for the future of the family, instead of only themselves. while the western counterpart may just be in it for the short term. but generalizations are never accurate.
Romain Guerel (French working in Beijing) - July 22, 2007 5:09 PM
Dear Todd,
Atc gave an answer but mine is easier: Love is not rational!
- - July 23, 2007 9:00 AM
I went for an interview earlier this year with an real estate consultancy. They sell off plan in emerging markets like Dubai, Eastern Europe, South East Asia and Brazil.
The vast majority of their investors were speculators, and a lot of their business was from the US. Most of the deals were done purely over the internet and the phone. It seemed to me they were the ultimate bubble business.
Interestingly, they pushed China very hard up until a year ago. Now they have abandoned China and wont touch it. This decision had nothing to do with a bubble (or otherwise) in the Chinese market, it was purely based on the fact that they dont trust the government and legal system.
tHEY deal in mongolia, kazakhstan, but not china.
Jeremy - July 23, 2007 9:35 PM
Prices not in a bubble in Shanghai? That's crazy talk.
From what I have heard from talking to many people, prices bottomed at the mid 1000's per square meter in (much of) Pudong during the downturn of the late '90s.
Since then, prices have shot up to about 13K per square meter in (much of) Pudong. A 10x increase.
While there is no doubt in my mind that massive development has led to a significant portion of this increase, I find it hard to believe that all of it is sustainable in the long run.
There is a bubble in Shanghai housing prices - and in many other parts of China as well.
NRT - July 28, 2007 3:27 AM
I find it hard to believe that there isn't a bubble - at least in Beijing - given that rental and purchase prices have moved in opposite directions over the past five years. Renting is now very cheap.
It seems that investors, who are mainly interested in the potential for capital gain, are over-looking yield... which, at least to me, suggests something of a bubble.
And as somebody pointed out earlier, there's the issue of quality, even if there have been improvements.
As anybody who has spent more than a couple of years in China knows, most buildings here degrade fast. Seventy-year lease? You'll be lucky if the place is still fit for human habitation after twenty. Doesn't that affect value?
nanheyangrouchuan - July 28, 2007 6:25 PM
"As anybody who has spent more than a couple of years in China knows, most buildings here degrade fast."
Chinese concrete tends to use alot of sand so you can get more volume into the trucks and the portland cement is extremely impure. Take a look at Chinese highways built ten years ago, the supports are already flaking off big pieces of concrete to the point where you can see the rebar supports.
And one of the main concrete suppliers to Three Gorges Dam was shot for accepting over $1 million USD in bribes.
Anyway, the concrete is crap and the application is crap. The whole point is to use the cheapest concrete possible and get it formed and poured as fast as possible.
For any expats who live in a highrise...
Charles Liu - July 30, 2007 2:59 PM
Is that why HUD secretary Alphonso Jackson pitched Mortgage-backed Securities to the Chinese during his recent visit?
We don't have a housing bubble either.
(credit goes to Sun-Bin.)
Charles Liu - July 30, 2007 2:59 PM
Is that why HUD secretary Alphonso Jackson pitched Mortgage-Backed Securities to the Chinese during his recent visit?
We don't have a housing bubble either.
(credit goes to Sun-Bin.)
sunzj - August 11, 2007 12:08 PM
Wonderful dicussion about real estates in China...