About China's real estate bubble: fact and fiction

Summary: Facing a new powerful rival presents a hegemon with choices. We can improve our game, reform, revitalize to meet the challenge. Or take refuge in fantasy, ignoring our weaknesses and exaggerating those of our rival. America has chosen door #2. Here we peer through the propaganda fog, seeking a better perspective on one aspect of the China’s bust forecasts — China’s real estate bubble.

China’s real estate bubble, 60 Minutes, CBS News, 3 March 2013 — “If trouble comes in threes, then what’ll be the next global market to melt down after the U.S. and Europe? Some are looking nervously at China.”

In 2001 attorney Gordon Chang published The Coming Collapse of China. He listed China’s most serious problems, concluding

How much time does China have? No one knows for sure, but China cannot continue to spend at the current pace for much longer. Beijing has about five years to put things right. No government, not even China’s, can defy the laws of gravity forever.

In the 13 years following that prediction China’s rapid growth has continued. Since then many others have joined Chang’s chorus of doomsters (few or none acknowledging the failure of their forecasts). And China does have serious problems. Even its long period of rapid growth has become problematic, inducing stress requiring fundamental political, economic, and social reforms. But everybody, every nation, has problems. What differentiates the fates of nations? One factor is their ability to see their challenges and respond to them. China’s history since Mao’s death in 1976 shows such wisdom and adaptability, probably on to a greater degree than Japan, Europe, or America.

Another is their boldness and willingness to invest in their future. That was once a characteristic of America, with the government undertaking great projects before they were commercially viable, such as the Erie Canal and the Transcontinental Railroad. Contrast America’s mad low level of infrastructure investment (shown here). Now we mock China for doing something similar, building high speed railroads — while they can do so cheaply, to be used for the next dozen generations. Which decision will look wiser a century from now?

Today’s the doomsters focus upon China’s real estate boom, probably projecting America’s stupidity on China’s leaders. It’s mad imperial logic:

We poorly handled our real estate bubble.
We’re better than China.
Therefore China will do even worse. QED.

But there’s always a remnant of the clear-sighted — those who see the world in terms of data and processes, not fears and linear extrapolations. For example, here are some excerpts from a Bank of America Merrill Lynch’s report “Demystifying China’s ‘ghost towns’”, by Ting Lu, Xiaojia Zhi and Larry Hu (13 March 2013).

Overgeneralization from a small sample and extreme cases

Favorite “ghost towns” covered in media have been invariably from the following short list: Ordos in Inner Mongolia province, the New South China Mall in Guangdong province, Chenggong in Yunnan province, Yujiapu in Tianjin municipality and Zhengdong in Henan province. The fact that global media failed to greatly expand the list in the past few years suggests that the number of ghost towns in China should be quite limited. We highlight that China has 711mn in urban population and more than 100 cities with 1mn population. And, these reports, when citing those “ghost towns” with pictures or videos, rarely mentioned numerous new cities and new districts in China which are now crowded with residents.

Among those above-mentioned “ghost towns”, Ordos is the most famous. The case is unique as the Ordos region boasts perhaps the richest natural resources and has the highest GDP per capita in China … Turned super rich suddenly, the Ordos government lavished its wealth on public projects which resulted in a grand new town 25km from the old one in a desert with a sparse population. The existence of a “ghost town” in Ordos, which is called Kangbashi New District, is undeniable, but we cannot jump to the conclusion that the rest of China are similar to Ordos. What we can learn from Ordos is that the city failed to efficiently use its huge windfall gains from natural resources.

Factual issues related to “ghost town” stories

… The latest CBS “60 minutes” report on China’s “ghost towns” … the reporter claimed that “Most people in China live on about less than US$2 a day. And these apartments probably cost upwards of US$50,000 or US$60,000. So it’s very unlikely.” In reality, however, China’s household expenditure was significantly underestimated by the reporter. In 2012, no more than 15% of Chinese people lived on less than US$2 a day, according to the National Bureau of Statistics of China. …

Lack dynamic view of a high-growth economy

Despite the slowdown in recent years, the Chinese economy is still growing at a strong pace of around 8.0% with 1.4% of its population (18mn) urbanized each year, so China’s property should be quite different from those developed economies with stagnant economic growth and are fully urbanized. …

Home supply: 65mn units of vacant homes?

The widely cited “65mn vacant homes in China” originated from an informal short article which claimed that, according to China’s State Grid’s data, 65mn electricity meters in China never operated. However, the State Grid has not confirmed this. Is it possible that 65mn electricity meters do not run at all? Are there really 65mn vacant homes?

YES if including the rural area. There are 250mn migrant workers in China with most of them not living in their rural homes except during the Chinese New Year holiday. So vacancy rates in China’s rural area could be quite high as the 150mn migrant workers who live away from their rural homes account for 23% of China’s rural population. … But not so many vacant homes in cities. … Unfortunately there is no reliable statistics on China’s vacancy ratios …

Adding up new urban home demand from urbanization and upgrading, we estimate China needs to build about 14.5bn sqm (or 162mn units) in the next decade. With 1.1bn sqm completed in 2012, the growth rate of home completion (regarding floor space) could average about 3.5% to satisfy this demand in the next 10 years (slowdown from the average growth of 6.0% in the past decade). …

A nationwide big property bubble?

We don’t think so We can check a bunch of other factors including financial leverage, home prices vs income growth, affordability and housing value to conclude that China’s property sector is not as worrying as those “ghost town” reports have depicted. Surely as China is big and diversified, there should be no surprise to see bubbles in some cities and high home prices (not necessarily bubbles) in some other cites, but to claim that the whole China’s property market is a big bubble is an exaggeration.

High financial leverage in the property sector?

China’s households’ mortgage debt was only 16% of GDP as of end-2012, compared with 87% in the US. Down payment ratios for first homes have been at 30% and for second homes now are at 50%. For banks, mortgage loans accounted for 14% of total bank loans at end-2012, much lower than its global peers (72% in the US, 86% in UK, 64% in Japan and 46% in Korea in 2012). …

Future of “ghost towns”: case by case

For the few famous “ghost towns” mentioned numerous times by media, there is no doubt that they are truly empty at present. But they may have very different future. Some may see renaissance, as what happened to many other once “ghost towns” (note Pudong of Shanghai was once called “ghost town” too), while others may not be able to turn around. …