Wednesday, June 27, 2012

China’s Housing Boom Has Ended

By Tianlun Jian

Is the ice thawing and spring returning to China’s housing market? Investors have recently dared to ask this question.

The recent interest rate cuts and Premier Wen Jiabao’s words re-emphasizing “stable growth” have led the market to wonder if the Chinese state has changed its policies for controlling the housing bubble.

Moreover, in a few cities, housing prices and sales volumes either stopped declining or picked up in the last couple of months.

Nonetheless, the facts don’t support optimism about the housing market at this time.

First, even though the decelerating economic growth has forced the People’s Bank of China to cut interest rates on June 8, the Chinese state seems to be firm about its housing control strategy.

Within 10 days in mid-June, four ministries (Ministry of Housing and Urban-Rural Development, National Development and Reform Commission, People’s Bank of China, and China Banking Regulatory Commission) independently made public announcements to stop the rumors about easing the controls on the housing market.

Second, for the country as a whole, the downward trend has been continuing since October 2011. Among the 70 large and medium cities that the National Bureau of Statistics follows, housing prices declined in 55 cities in May, compared to 12 months ago.

Third, in the largest cities, housing prices are just too high by any measure. In many cities, including Beijing and Shanghai, price-to-income ratios are around 30-to-1, almost twice as much as Japan’s 16-to-1 when its housing bubble burst in 1990. In the United States, the housing price-income ratio was only 3.3-to-1 in 2011, and even in Q4 2005 at the peak of the housing bubble, it was just 5.1-to-1.

Fourth, vacancy rates in China have been well above the normal range of 5 to 10 percent in advanced countries. Several survey studies in Beijing, Zhengzhou, and Hangzhou show that vacancy rates are around 30 percent.

On March 31, the Beijing Municipal Public Security Bureau published a report of a 100-day population investigation project. It says that in Beijing, 3.8 million housing units, out of the existing 13.2 million housing stock, are vacant. Beijing’s vacancy rate is 28.9 percent.

Professors Zhang Jingqiu and Meng Bing of Beijing Union University made an investigation in over Beijing’s 50 district areas and found 27.2 percent of housing units did not use any electricity for more than half a year. 

In 2010, 12 college students spent two months visiting 11,000 housing units in six district areas in the city of Zhengzhou. They found one newly developed area had a vacancy rate over 55 percent, while the other five district areas had vacancy rates all above 20 percent.

In sum, the correction in China’s housing market will continue, and the soaring prices in Beijing, Shanghai, and the other largest cities will drop significantly. It is only a matter of time. A hard landing will speed up this process.