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Understanding Chinas Urban Real Estate Market | The GailFosler Group

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Understanding Chinas Urban Real Estate Market

Y O U M A Y A LS O LI K E

Chinas urban property market is the most critical factor in

gauging Chinas economic slowdown. And given the size of
the Chinese economy, its urban property market
performance is itself disproportionately important to global
growth. Including industries and services that are closely
associated with property markets (such as steel, cement,
glass, etc.), real estate is estimated to account for 25 to 35
percent of GDP, which is unusually high by international
standards.

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Understanding Chinas Urban Real Estate Market

By Pieter Bottelier

Can robotics help Chinas

manufacturing industry stay
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labor costs?

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February 27, 2015

While a sharp drop in real estate is unlikely, given that the

sector is still growing, the unusually high share of real estate
in Chinas GDP illustrates why all eyes are on the property
sector as a guide to how Chinas economy and by
implication much of the rest of the world will perform in
2015.
Taking a Positive Market View

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Pieter Bottelier, an
economist and
China scholar, is
the author of many
articles and book
chapters on Chinas
economy. He has served as senior
adjunct professor, Johns Hopkins
University School of Advanced
International Studies, since 1999;
senior adviser on China to The
Conference Board from 2006 to 2010;
and visiting scholar at the Carnegie
Endowment for International Peace
since 2009. He also served as adjunct
lecturer at Harvard University (2001
03) and Georgetown University
(2004).

Taking all of the contradictory views and data into account,

I believe that there will be no crisis in housing or
financial markets and no hard landing. China has a
strong track record in managing its transition to a private
sector dominated market economy and still has important levers to manage its economic (and real
estate) transition.
Indeed, if the recent upturn in housing prices in tier 1 cities (see chart below) holds and spreads to
lowertier cities, it is possible that the overall economic downturn will come to a halt sooner than
most analysts expect. In spite of all the current problems related to corruption fighting, capital
flight and apparent discrimination against foreign firms by regulatory agencies, growth may be
higher than most analysts expect, even in the nearterm. However, the most probable outcome of
ongoing economic and financial reform struggles is that after a few more years of slowing but still
significant growth, Chinas potential for high mediumterm growth (7 to 8 percent) will reemerge.
These are somewhat controversial views and are not intended to dismiss the difficulty of
disentangling developments in the housing market in China from developments in the financial
sector and the broader economy. Uncertainty and instability in Chinas financial and property
markets will probably continue until market conditions have stabilized and the ongoing process of
financial liberalization has essentially been completed several years in the future.
Why Is Gauging Chinas Housing Market So Hard?

How Important Is Digital

Technology to Our Economic
Future?: An Interview With Rob
Atkinson

If the Chinese real estate sector is so important, then why is there such a wide range of opinions on
how the market is doing and what lies ahead? As a result of the way most of Chinas urban housing
was privatized between 1998 and 2003 by transferring ownership from the state to residents at
artificially low prices speculative house buying became common when initial ownership
restrictions expired (around 2003). This led to potentially dangerous real estate bubbles, which the
government has been trying to control ever since.

Digital technologys economic

promise is great but its
economic impact may be

The most recent bubble emerged in 2009 when, as an unintended consequence of Chinas massive
stimulus program, much additional credit ended up in additional property supply and demand.

M O S T PO PULA R

limited without better public

policy.
Read this article >>

Unemployment and Stock

Prices: Is the Stock Market
Aging?

Chinas effort to restrain the emerging housing bubbles (i.e., housebuying restrictions) was very
different from that in the United States during the years leading up to the global financial crisis of
2008.
As a result of Chinas efforts, urban housing markets began to stabilize and then turn down
somewhat in the last part of 2011, before rising again in early 2013 and falling further in 2014. In

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Aging?

Stock prices are likely to

flatten as lower
unemployment rates signal a
maturing cycle.

somewhat in the last part of 2011, before rising again in early 2013 and falling further in 2014. In
the last few months, prices have begun to stabilize, particularly in tier 1 cities (Chart). Some
believe that the downturn has already bottomed out, while others expect worse to come.

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The most important reasons for the wide gap between the bulls and the bears on Chinas housing
prospects are:
1. A deficit of reliable data on important market indicators like property prices, housing
starts and market overhang as well as demand components like new demand from
urbanization, upgrading, replacement and the effects of speculation. Given the fact that the
commercial real estate market in China is still very young, the lack of data is not surprising.
2. Large differences among individual (segmented) urban markets that make it difficult to
interpret what is happening in the overall market. For example, the market overhang
appears to be much larger in tier 2, 3 and 4 cities than in tier 1 cities such as Beijing and
Shanghai.
3. Major differences in market conditions between commercial residential real estate and
social housing. Since most lowincome urban families cannot afford higherend housing, the
greater relative demand is in the subsidized, social housing sector. Financial market analysis
tends to focus on the overhang in the commercial sector and fails to take into account the
excess demand arising from the shortage of affordable, governmentsponsored housing.
4. The sheer size of Chinas residential housing market means that market assessments can
be off by tens of millions of potential homebuyers. Chinas urban population is about 740
million and is growing 15 to 20 million a year. By comparison, the total U.S. population is about
320 million and is growing at about 2.5 million a year.
5. The poorly regulated shadow banking sector is a significant source of finance, including
credit to the real estate sector. The effects of shadow banking have further obscured the real
flow of credit to the sector.
Chinese Financial Policy: Taming the Lion
The importance of the ongoing gradual liberalization of Chinas financial system and its role in the
current real estate conundrum cannot be overstated. Until fairly recently, China used the banking
system to mobilize resources for national development an approach often referred to as
financial repression (i.e., artificially depressed deposit and lending rates). This approach
contributed to the emergence of relatively uncontrolled shadow banking, which, as mentioned,
financed much private housing development in recent years.

Since Chinas huge urban housing privatization of 19982003, urban real estate became an asset
class for investors, fueling speculative housing demand and price bubbles. Speculative demand
triggered speculative supply, contributing to distortions in land markets and corruption related to
the rezoning of agricultural land for development purposes. These distortions make it difficult to
separate underlying structural housing demand from speculation to this day.
In assessing the risk of a housing crisis and associated financial crisis, it is important to note that,
despite a degree of media hysteria, price movements after markets began to stabilize in 2011
were never dramatic in China and differed between cities, sometimes even within cities. In no case
was there an acrosstheboard real estate price collapse like we experienced in the United States in

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the years preceding the global financial crisis of 2008.
Market indicators seem to suggest that since the end of 2011, real estate market adjustments in
China have been cyclical in responding to market dynamics and credit flows rather than geared
toward a longterm structural decline. The government is a powerful moderating force in this
market, and it appears to have once again reversed market trends this time moving the real
estate sector toward a recovery.

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