China residential: bubble or not?

January 14, 2015 admin

In the United States, the recent Great Recession had a number of different drivers, among them leverage, light regulation, residential real estate and subprime mortgages. As we move out of this challenging and complex time, memories fade and generalizations become magnified. Among them, a hot residential real estate market can help melt down an economy.

There are a wide range of potential threats and concerns regarding China’s future economic health. They include the shadow banking system, growing debt levels, rising wages that threaten China’s export economy model, corruption, etc. These and other concerns are well known and are being addressed. Time will tell how well they are managed.

Among the many challenges facing China’s future growth, one of the main ones has been real estate. Some prime examples that have been used in press coverage of the situation include the New South China Mall in Guangdong Province, which opened in 2005 and is the world’s largest shopping center, is often described as a retail ghost town or numerous high-rise residential towers that are vacant in many regional cities. Plus, you add in this statistic — the homeownership rate in China is higher than in the United States, at 89 percent versus 66 percent — and it does pose the question, how much higher can it go?

But residential real estate may not be China’s Achilles heel. A report by Andy Rothman, investment strategist with Matthews Asia, presents a compelling case for why China’s residential property market may not be in a bubble after all. One key point made by Rothman is that “China is not just Shanghai.” By which he means that the Chinese market is huge; one city cannot and does not typify the whole of the Chinese real estate market.

According to Rothman, “There are more than 150 Chinese cities with a population of at least 1 million (only nine U.S. cities and 50 metro areas are comparable in size), and these account for the vast majority of home sales” which are driven by owner-occupiers (90 percent according to his report), not speculators. Plus, keep in mind, these are low-leverage transactions that have a 30 percent down payment requirement.

He really puts the market into context with this point, “The four tier-one cities of Beijing, Shanghai, Guangzhou and Shenzhen last year [2013] accounted for only 10 percent of China’s urban population and 5 percent of total residential property sales (by floor space).”

He goes on to point out, “There are failed projects, but the ‘ghost city’ story is greatly exaggerated. For residential projects three years post completion, the vacancy rate is 15 percent, similar to the 14 percent vacancy rate for the U.S. housing units.”

To see Rothman’s report putting China’s residential real estate market into perspective, click here. It’s an engaging read and includes thoughts about one policy move that could give the property market a new boost!

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JohnHunt91x119John Hunt is conference program manager with Institutional Real Estate, Inc.

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