NCCREA Data Points

NCCREA Research Team

August 2011

According to the South China Morning Post, an economist from the

ChineseAcademy 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 notingthat 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. Price-to-rent ratios in Beijing and seven 

other largemarkets 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 authors observe that:

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.
• 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 thenet 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 1Q2011, 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% ofChinese GDP, employs 14.3% of all workers in urban areas, and consumes about 40% of all steel and lumber produced in China.