More Evidence of Froth in China’s Housing Market

If the sky-high prices relative to income aren’t enough to convince you, consider this discussion from Patrick Chovanec (hat tip reader Michael) who contends that China’s latest effort to contain housing prices, the reinstitution of a property sales tax, is likely to be counterproductive:
In China, however, “flipping” is not the problem. Some people may be engaged in short-term ”flipping,” but as I’ve described in my FEER article “China’s Real Estate Riddle,” a lot more are buying residences — in many cases multiple units — and holding them vacant indefinitely as an unproductive ”store of value,” like gold. As I mentioned in my article, the Financial Times estimates that there are 587 million meters of apartment space that buyers have purchased over the past five years only to leave lying empty (for a concrete notion of what this statistic means, take a look at Al Jazeera’s report on Ordos). This puzzling phenomemon is due to the fact that Chinese citizens have relatively few investment options, and China’s real estate sector (unlike its stock market) has never experienced a sustained downturn since the country converted to private home ownership in the mid-1990s. The fact that China has no annual holding tax on property means there is little penalty for letting property lie idle, in the hope that it will appreciate or at least retain its value. The result is an inflated market where the demand for property as a pure investment vehicle far outstrips the demand for affordable, usable space.

If people were trying to “flip” their properties, that might actually be a good thing. At the very least, it would mean those residences would have to be brought onto the secondary market and priced. What we see in China, though, is an extremely weak secondary market. In the U.S., the ratio of secondary to primary residential property transactions for the first half of 2009 was 13.45; in Hong Kong it was 7.25. In China as a whole, that ratio was 0.26 (four times as many new home purchases as secondary sales). Even in China’s most developed markets the ratios were just 1.30 for Beijing, 1.56 for Shanghai, and 1.35 for Shenzhen. [Keep in mind that an immense quantity of existing housing stock was privatized in the 1990s, at nominal prices, so the explanation cannot be simply that China is a “new” market — China actually has a higher rate of established home ownership (80%) than the U.S. (70%)].

The way I read these figures is that an immense amount of new housing is being purchased and accumulated (in a vacant condition) off-market. Nobody has any idea what it is actually worth because there is little urgency to offer it, to end users, on the secondary market and actually see it priced based on their demand. If investors were at least trying to “flip,” we might find out, but they’re not, and so prices for new residences (especially on the high-priced luxury end) continue to rise without anything to bring them back down to earth.

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  1. MyLessThanPrimeBeef

    They say there are only two man-made things on Earth you can see from the Moon – the Great Wall of China and the empty apartment buildings, also in China.

    On a clear day, of course.

  2. Karen

    Weird. Even condos cost money to maintain and keep insured, and as time goes by they will become dated, won’t they?

    Why do you suppose these people aren’t even trying to rent out the condos? Seems like even some rent money coming in every month is better than none. Do they think renters are likely to cause more damage than would be covered by the moneys (security deposit + rent payments) the renters would pay?

    Is it very hard to evict renters in China?

    1. ozajh

      If prices are rising quickly, rental income can be almost irrelevant and as you say there are expenses involved.

      This can even happen with commercial property.

      (And in fact any organisation who HAD organised a long lease for the tower in 1966 at the asking rent would have been laughing all the way to the bank by the mid-1970’s . . .)

    2. molecule

      Renting is difficult because:
      – everybody owns a place(or more than one)
      – new families will borrow from family and buy, instead of rent
      – new units are sold bare, they have no floors, light fixtures or bathroom/kitchen fixtures. The buyers will decorate as they wish. It’s cheaper to buy and keep vacant than decorate and rent.
      – if they don’t own a place new families will “double up” until they save enough to buy
      – new developments are usually built far from city centers, it’s harder to find tenants willing to commute

      That said, it’s easier to rent in bigger cities, near attractions, or in university towns. Even so, rents a are very low.

    3. Adi Hadi

      The Chinese Middle class seems to have not much knowledge about concrete flats and the need to occupy them to prevent gradual decline of the building substance, in particular when low quality concrete is involved and a fluctuation of temperature during a 12 month period between approx. -30C° and +30C° is the standard weather condition. Here in the capital of Inner Mongolia, I’d rather rent my 150m2 for 150US$/Mo. than buying for 65,000US$ – a flat that is bare brickwork (the Chinese way of selling new flats) and doesn’t include the ground its standing on and belongs to me no more than 70 years (Chinese law). Buying one or multiple flats as a kind of wealth preservation under this conditions is cheer nonsense. The city has approx. 100 high rise apartment towers constantly under construction. Most of them are sold but only a few are occupied. I know of a lot of brand new buildings empty since at least three years. There are a lot of other things that don’t make sense, but that would be beyond time frame.

  3. molecule

    If real estate prices and other prices are going up and you hold currency what are your options?
    Even lowly steel factory workers own multiple of these vacant units. My Chinese wife’s four sisters own at least two each.

    Some families plan to give the extra unit to their child as a marriage gift. Sounds reasonable to me, give the child a head start in life. Compare that with the US system where most every family is held back by a mortgage.

    1. bob

      How does your wife have 4 sisters in China?

      This would seem to be impossible with the one child policy.

      Honestly wondering, would love to know more details. Is the one child policy not taken as seriously as some try to make it sound?

        1. bob

          Thank you for the reply. I thought the policy was older than that.

          This brings up another practical question, if they are going to give them to their kids, why do they need more than one?

          Obviously not that familiar with the landscape, but very curious about the practical incentive set up.

          What about the household demographics? Are they changing at all? Are younger people getting priced out?

          What is the process by which ownership is passed? Are they giving them away, or selling them to their children?

          Thanks for the insight.

          1. molecule

            Why do they need more than one? Just “to keep”. At least that’s the answer you’ll get. As far as I know there is no inheritance or gift tax in China.

            Yes, younger couples are being priced out, but the family usually helps out. If they do get a bank loan they pay it back as soon as they can.
            As for the “aging population” problem, I don’t see one. These old folks consume next to nothing. They even refuse life saving treatments to leave more to their children.

    2. bb

      does china allow foreign currency savings or there are exchange controls that limit the investment options of savings?

  4. Independent Accountant

    I’m with you. China’s real estate market is a disaster waiting to happen. China has too much capital invested in export industries. Now it’s time for IA predicts. Like the US had a more severe contraction than Europe in the 1930s, China’s contraction in the next 5-10 years will be more severe than in the US.

    1. Doug

      Why is this a disaster waiting to happen? Is there anything specifically why that is so? I don’t even see any mention in this article of debt being deployed. So I don’t know why, other than that, there is anything inherently disastrous.


      1. bb

        the roman empire did not sink in debt either, but all its fortune was squandered on entertainment and edifices. when you put all your savings in structures that do not bring you any return on the capital, you are a drag on the economy. the chinese banks have lent this year alone the equivalent of $1.5 trillion in new credit, next year another trillion is planned. this is way above the foreign exchange holdings of the country. when the banks run into trouble, there is no effective way to recapitalize them as most remaining savings are in the form of unused brick and mortar.

  5. purple

    Hoarding (in this case real estate) is rarely an activity compatible with growth in capitalism. China in the 19th century was the global sinkhole for silver, but it was for hoarding or luxury goods, and didn’t do much for their economy.

    It looks to me like China is heading for a trade deficit in 2010. The EU has a trade surplus now, and the US deficit is shrinking. This might force a yuan devaluation.

    People should stop waiting for a China collapse because it’s unlikely to happen, but there are some strong headwinds on the horizon.

  6. Daniel de Paris

    This puzzling phenomemon is due to the fact that Chinese citizens have relatively few investment options

    This phenomemon is strictly a monetary one.

    In view of negative real interest rates (where is the China shadowstats??) and the ultimate monetary killing, pegging to a weak external currency, not a chance to kill the phenomenom tax-wise.

    That reminds me of an old French story. We had massive inflation, monetary-source of course, and the government unhappy with the vicious slide of the pricind indices decided to make it happen, price stability. The harsh way.

    The “baguette” did belong to the index. At a prominent place. They – government – fixed price for bread in stone. For a couple of years What happened is comical, “boulangeries” did close on a massive scale. We had no bread. That stopped in the end. But still to-day, France boulangeries are only a portion of what they used to be. Great achievement.

    In view of the massive credit binge and what is in store for 2010, the next step is, potentially, price-control. And its related soviet-style “local food shortages” in remote areas only of course.

  7. bill

    Thanks for this very informative post. I think that a property tax would certainly not encourage more real estate speculation, and would have some (at least to “socialists”) appealing potential wealth redistribution effects, but I don’t think an annual property tax would have a material impact on the growing real estate bubble here, for the following reasons:

    1. Owners in China already pay property management fees on those vacant properties, at an annual rate of somewhere between 0.1 and 0.5% what they paid. So they are already bearing annual, cash carrying costs for these vacant properties, and an additional 0.5-1.0% in property tax (the numbers I have heard bandied about but I am not sure anyone knows what the likely number really might be) is unlikely to be meaningful to many of the owners;

    2. My assumption is that most of the places that are vacant, with no real attempts to rent them, were either purchased in cash and/or the owner is rich enough that they can handle an incremental 25-75k rmb a year in property taxes, on top of the property management fees they are already paying. It would be helpful if you have any data on the composition of ownership, from net worth to mortgage size to percentage that paid in cash; I have not been able to find that data, but based on my personal experiences in Beijing a property tax for most of the owners of these vacant properties would be a nuisance but not much more;

    3. The Chinese I know in Beijing and Shanghai with multiple properties bought them either because they had too much cash and no good place to invest it other than real estate, they assume that even if prices are high now in 10 years in world class cities like Beijing and Shanghai they will be even higher, and/or they are buying as an inflation hedge. I think Chinese people culturally have been conditioned to see real estate as an inflation hedge and a savings vehicle, much more so than in the US (our houses were seen as consumption vehicles for the most part);

    4. I think that reintroducing limits on buying by foreigners, especially Hong Kongers, could have a meaningful impact on at least the high end of the market. There has been a Hong Kong buying frenzy in Beijing (and I assume Shanghai) fueled by cheap and easy money in Hong Kong (thanks to the peg and the Fed) and real concern about a dollar collapse and inflation, coupled with the fact that Beijing and Shanghai still look pretty cheap compared to Hong Kong. One anecdote, the Beijing Four Seasons residences (soon to open next to the Lufthansa Center) were only sold in Hong Kong. Day 1 they were priced at 70,000 RMB/sq m; demand was so high that in a matter of days the price was raised to 100k, and they are now all sold out. They were never marketed in China, other than to insiders (friends of the developer could buy for 35,000 RMB sq m in May). Curbing this kind of speculation from overseas, much of trying to play a long RMB/ short USD (you can get very cheap USD mortgages in HK and through Bank of East Asia in Beijing) as well as hedging against inflation and playing the long term geopolitical and urbanization trends, would probably much more popular than a property tax, and for good reason. So long as the currency is not convertible, there is an argument to be made that if you are not a PRC citizen and you want to buy a property in the PRC you should have to live in it;

    5. Whatever effect a property tax might have on speculation, I think it would be at the margins at best and would not address the core, structural factors that have been driving price appreciation. In this interview posted today on 21st Century Herald with economist Lang Xianping he points out that the real causes of the growing real estate are extremely loose monetary policy/excess liquidity, overcapacity and structural problems that lead to misallocation of capital with massive corporate/SOE participation in real estate and equity markets using borrowed money [how many of these vacant apartments may actually be owned by companies? How many SOEs bidding on urban with basically free government money?]

    6. I have had several Beijing friends who have started buying the US. They don’t see the property tax as a reason not to buy, they just see it as one of the costs associated with the transaction and factor for it accordingly

    I think a property tax can’t hurt, but much deeper, more structural efforts are needed to really try to reign in some of the excessive speculation.

  8. But What do I Know?

    Thanks for the article, but can I pick a nit?

    Did you mean 587 million *square* meters of apartment space?

  9. rjs

    from: Say’s Law in China – Is China producing too much of everything? Say’s Law says that’s impossible. Then how about too much housing? Perhaps, but here are some relevant estimates (or I should say guesstimates, as I had trouble finding data):1. When I visited in 2006 the Chinese media indicated that the average urban apartment had increased from about 85 sq feet in 1980 to somewhere around 250 sq feet. By now I imagine it is well over 300 sq feet.2. Much of the urban housing is very substandard, and should be torn down at some point.3. In a modern economy housing units are up closer to 1000 square feet.4. Somewhere around 60% of Chinese residents (750 million people) live in rural areas.5. In the next few decades China will become overwhelmingly urban and middle class.6. China’s population will grow by at least another 100 million

    1. bill

      Philip, how hard are you looking? If you can read Chinese check out There are apartments for rent all over Beijing, and very many empty in the high end CBD complex in which I live (several friends are currently trying to rent out the places they own)

      I have spent every day looking for commercial retail space in Beijing CBD. In most of the buildings other than Kerry/China World properties you get the feeling someone set off a neutron bomb.

  10. Philip Wen

    There is not one ounce of fact in this article. The apartments are fully rented out. I simply can’t find any vacant apartments in Beijing or Shanghai. The 2ndary residential market transaction volume is 3 times newly built ones as of 2009.

    The authors are looking from outside in, and paraphrasing old articles. This kind of analysis is what loses money for readers.

    1. bill

      Philip, how hard are you looking? If you can read Chinese check out There are apartments for rent all over Beijing, and very many empty in the high end CBD complex in which I live (several friends are currently trying to rent out the places they own)

      I have spent every day looking for commercial retail space in Beijing CBD. In most of the buildings other than Kerry/China World properties you get the feeling someone set off a neutron bomb.

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