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Housing in China- Dynamics at Play

December 27, 2011

There has been much talk in the West recently of China’s housing bubble, and when this will pop, whether this will pop, how it will pop, etc. Here is Shanghai there are some audible popping sounds, especially in the outskirts of the city, such as in Minhang or Putuo, where prices were especially overvalued. In the inner city, where real estate is more valuable, prices have decreased by substantially less, though turnover is becoming less, and units are taking longer to move. Transaction volumes have dried up in many restricted zones by up to 80%. Transactions in unrestricted areas are holding in the 70% to 80% range as compared to pre-restriction volumes. This is also the sign of a slumping housing market.

And the market is slumping from great heights. On Huashan Rd, in Shanghai, where GCiS’ office is located, any new apartment building constructed in the past 10 years is worth at least ¥30,000, or nearly USD 5,000 per sq m. Some are worth in the ¥40-50,000 range. A typical newer unit is about 150 sq m, so many single apartments on this road are worth near or over $1 Mn, likely comparable to certain blocks in New York City. About 12 years ago, it would be hard to find an apartment in this neighborhood worth more than 10,000 sq m per unit, in nominal terms. This means 10-12 year appreciations of 3-500%.

A correction though in this case is not a euphemism for a crash. There has been no crash, and there is not likely to be one. In fact, prices in on Huashan Rd. and in Shanghai in general, and extending to other Tier 1 cities, are not likely to fall by a great amount, and for two main factors: government influence, and the prevailing dynamics of this market.

First, the government. The central Chinese government has stated that it wants housing prices in major cities to decrease, and it wants this to go smoothly, and this is exactly what is happening so far. The PBOC reportedly has internal limits for housing declines. It is guessed that these are in the 25% to 30% range. Declines to and beyond this point endanger the health of the banking sector.

This is an area, an important area, where the government can really pull levers and tighten clamps and make things happen. Consider: when the central government, the State Council, announced that housing was too high in cities like Shanghai, it started to introduce a range of measures to remedy this: higher down payment requirements for buyers, taxes on higher value properties for non-primary residences, as well as several small hikes in the interest rate, and a curtailing of loans to developers. At the local levels, on signals from the central government, approvals for new developments have become more difficult to achieve. In all parts of the country, only qualified first time buyers can purchase on a bank loan (and yes, down payment requirements are up – except for government sponsored “economic housing” units). Further restraints, both in specific qualification and total allowable portfolio size have been placed on the banks. This comes on top of the various money supply constraint measures placed upon banks to fight inflation.

Westerners may not realize all the tools that the Chinese government has at its disposal here. And if prices drop to far, or sales stagnate, then it can employ these tools in reverse, and probably will. The government can reverse any of these measures at anytime. It wants a robust housing market, though a less expensive one, and can to a good degree manipulate this process. The government unleashed this market in the first place in the late 1990s when it created the housing mortgage market. It is also now in the process of overseeing the construction of millions of new Social Housing units. And it  is rumored to be planning selective easing of restrictions and targeted bail-outs of developers and construction companies in the post-CNY period.

Next, dynamics. The central government can tweak the market successfully because the basis of this market is strong. The combination of economic growth, a giant population that is becoming more urban, and a handful of key cities has created a property dynamic unprecedented in the West, which should mean strong demand for years or decades to come. Let’s examine this more closely.

Economic growth is understood. For absolute GDP, China will exceed US$6 trillion in 2011, from less than USD 1.5 trillion in 2002, nominal. Population is also understood, now estimated to be over 1.4 bil. Moreover, and importantly, China now reports that the country is 50% urban. This really depends on how urban is defined. For example, there are a large number of migrants that work and live in cities most of the year, but are still based in the countryside. Whatever the definition, as China becomes more efficient in agriculture, and takes over more agricultural land for other use, urbanization will only increase, and with it the demand for urban real estate.

The third part of this equation is less well understood. China probably has about 25 leading or Tier 1 cities, as defined by size and wealth, with 4-5 of these being Tier 1A or Super cities and economic centers. These cities are often the main destinations of migrants- not just displaced countryside workers, but also educated professionals from other cities, as well as university students who move to a city to study and then stay and work there. It is estimated that Shanghainese (those born in the city)  now only compose only 50% of the real population of Shanghai. Half-empty streets during Chinese New Year, when most migrants return home, supports this. Office workers and entrepreneurs from other cities need a place to live. Entrepreneurs from Wenzhou and Ningbo purchase apartments in Shanghai for investment and rental, and there is also a set of wealthy Chinese from other provinces that want to guarantee a place in a Shanghai high school for their children by purchasing property in the city.  

And finally there is the lack of demand for investment alternatives. Apartments are one of the only vehicles that Chinese can invest in that is not a high risk investment such as a private business, or a negative real interest from a savings account. So pent-up demand for residential real estate remains very high. On top of these other dynamics, lack of alternatives only magnifies the demand.

In sum, even aside from economic growth there are a range of other factors that draw people from around China to purchase property in its larger cities. And space is limited. In Shanghai, downtown proper, even if including key parts of Pudong, is only a fraction of the city/province’s land area. The same applies to the inner Second Ring Road in Beijing, and prime parts of other large cities in China.

There is an expression in Chinese: “Can go up but cannot come down.” This is usually used about people, but in this case can also be ascribed to the China housing market in large cities. With these dynamics in effect, the market may go down, but not by a lot.


About GCiS China Strategic Research

GCiS ( is a China-based market research and advisory firm focused on business to business markets. Since 1997, GCiS has been working with leading multinationals in sectors ranging from technology to industrial markets, medical, chemicals, resources, building and constructions and a few others.


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