For a sector regularly called “the most important in the universe”, there is a remarkable lack of consensus over the Chinese housing market. Much of the debate boils down to whether China is currently under- or over-supplied with homes.
While data on the housing market is patchy in many areas, China’s National Bureau of Statistics (NBS) does publish information on the number of ‘commodity’ houses that the country has. Commodity homes are independent, modern units, built after reforms to establish a private housing market were introduced in the late-1990s. According to the NBS, by the end of 2012 (the most recent year for which data has been published), China had built 60m of these units.
The remainder of China’s housing stock can be split into two areas. Firstly, there are ‘legacy’ homes, which were built by the state before the introduction of a private housing market. They are generally of poor construction; China’s own housing ministry admitted that “houses built between 1979 and 1999 cannot meet the demands of modern living”. The second area is off-market houses; units built after the private housing market was established, but not sold on the market. These are mainly small-scale affordable houses (with an average unit size of around 60 square metres) or temporary worker dormitories.
According to the NBS, China’s permanent urban population (residents with an urbanhukou) was 480m by the end of 2012. The NBS also publishes data on the average urban household size, which in 2012 was 2.86 persons per household. This implies that by the end of that year, there were 168m permanent urban households. This figure doesn’t include migrant workers, a still marginal source of housing demand in China; only 1 per cent owned their own home in 2012, according to the NBS.
Quality is key in the housing supplyA straight forward comparison of this data with the number of commodity houses available suggests that, by the end of 2012, there were only enough commodity houses for 36 per cent of the permanent urban population.*By implication, the remaining 64 per cent lived in sub-standard off-market or legacy housing.
By focusing on the quality of China’s housing stock – and sidestepping the contentious question of its size – there is, therefore, a strong case that the market is currently under-supplied, with a chronic shortage of modern homes. If, as some are predicting, construction activity in China was to collapse, the remarkable improvement in the standard of living of China’s urbanites over the past 30 years would be hobbled, with the majority of the urban population remaining in substandard accommodation.
How does this square with the current slowdown in the housing market? That a large part of demand for housing in China is from people looking to move to bigger and better accommodation, in fact, goes some way to explaining this downturn. Upgrading demand is highly opportunistic in nature. If, as is the case at the moment, price expectations are negative or mortgages are expensive, much of this potential demand will withdraw from the market. In the absence of these buyers, less opportunistic demand from newly-created households is not on a large enough scale to prop up the market. Since 2008, the number of new commodity houses has, on average, exceeded the net increase in permanent urban households by 2m units per year.
In theory, this upgrading demand will, at some stage, return to the market. In particular, lower home prices should put bigger and better accommodation within the reach of more people, and resolve the problem of affordability which is currently holding back some of these potential buyers. This suggests that fears of an imminent collapse in China’s housing market may be overblown.
Property vulnerabilities mount as the market coolsThe problem, however, is that as the Chinese housing market cools, its vulnerabilities intensify. Chief among these is the vast number of empty houses, particularly in smaller cities. Speculation in the housing market is rife: we estimate that by 2013,
20 per cent of the urban housing stock was vacant, with more than 90 per cent of these empty units purchased by individuals for investment purposes. As we have demonstrated, there is sufficient demand to absorb these houses– even if these units were fully occupied, there would still only be enough modern homes for 36 per cent of the urban population – but a sudden influx, rather than steady drip of these properties onto the market would be disastrous.
Such is the danger of a prolonged downturn in China’s housing market; holders of empty units panicking and trying to sell their properties en-masse, leading to a price rout and further discouraging potential buyers. With the real estate sector estimated to account for
over 40 per cent of shadow bank lending, a prolonged slowdown also threatens to destroy a fragile web of financing, with repercussions for the entire economy.
In China’s housing market, strong underlying fundamentals, therefore, coexist with equally substantial risks. The government may well be able to stimulate upgrading demand to mitigate these risks, but home buying sentiment is notoriously difficult to dictate, and a market panic can quickly become self-perpetuating. The issue of whether China’s housing market is currently under- or over-supplied is perhaps much clearer than many think, but the future of the sector is still wide open to debate.
*In reality, part of the increase in the permanent urban population over the past decade has been due to the expansion of towns and cities into rural areas. Arguably, this has not generated demand for urban houses given that these rural residents, who have been reclassified as urban, already have homes. Up to 30 per cent of the increase in the number of permanent urban households is due to this reclassification, according to academic studies. Even if this part of the urban population is excluded from our calculations, there are still only enough commodity houses for 39 per cent of the remaining households.
Rafael Halpin is Head of Quantitative Research at FT Confidential, a research service at the Financial Times
