China: The Mother Of All Housing Bubbles
Hugh Pavletich
Christchurch
New Zealand
July 18, 2010
It would seem that of the residential complex on the outskirts of Beijing, the “Heavenly Famous Garden” development is
not…….well….a particularly heavenly experience at the moment (refer Financial Times article hyperlinked above).
China is clearly the “Mother of all bubbles”.
Note the “heavenly” $US3,500 price per square meter of this development – suggesting that at 100 square meters, the sale
prices of these units is in the order of $US350,000.
Within a recent article “Opinion: Houston, we have a (housing affordability) problem | interest.co.nz”, for the benefit of New Zealanders, I illustrated how they are getting new fringe starter land and house packages
developed in Houston for $US595 per square meter……..all up. That is - a 235 square meter unit (including double garage)
on a 700 square meter lot for $US140,000.
The latest 2010 6th Edition Demographia International Housing Affordability Survey (refer Schedule 2 Page 42) states the Gross Annual Median Household Income for Houston was $US56,300 – illustrating
that the new fringe starter housing stock is being put in place at about 2.5 times the Gross Annual Median Household
Income of Houston. Within the article noted above “Houston, we have a housing affordability problem”, I provide a
definition of an affordable housing market – that is – one that stays at or below three times annual household incomes
(Median Multiple).
What Beijings Median household income is – well I haven’t really got a clue as googling “Beijing median household
income” is not particularly enlightening. But at a guess the median (below the average) is likely in the order of
$US6,000 to $US8,000 per annum.
So the fringe Beijing Heavenly Famous Garden residential units at $US350,000 seem to be in the order of 43 to 58 times
Annual Median Household Earnings.
It is clear that the Chinese residential development model is a disaster.
Affordable housing can be supplied to those on lower incomes as Bill Levitt illustrated in America after the Second World War , where new homes were put in place at around $US7,000 to $US9,000 for SINGLE EARNER FAMILIES earning about $US3,800
per year – with mortgage repayments of around $US58 per month.
The Levitt houses of around 80 square meters were 1.84 to 2.36 times the house purchasers earnings – a dramatic contrast
to the “heavenly” residential developments being put in place on the outskirts of Beijing, at what appears to be 43 to
58 times annual household incomes.
The Chinese new housing market is in reality a ponzi scheme. It would appear Government officials and developers are
rigging the market to suit themselves, by severely constraining land supply, as this recent article illustrates - The housing bubble dilemma . It is now suggested that there are 65 million vacant units currently in the major urban areas of China, as explained
within this Zerohedge article China Has Been Covertly Funding A Housing Bubble Five Times Larger Than That Of The US: 65 Million Vacant Homes
Uncovered | zero hedge. Understandably, Fitch Ratings is somewhat concerned.
There is no social or institutional memory in China (or Ireland for that matter) of the costs and consequences of
housing bubbles.
Even if this vacant residential stock estimate is overstated, it does represent “real money”. At say (using a very
conservative estimate) each one of these vacant residential units has a bubble value of say $US150,000 – that represents
around $US10 trillion in a $5 trillion Chinese economy.
Total occupied residential stock REAL VALUE in a normal affordable housing market should not exceed 1.5 times GDP (check
out Texas as a guide). It would appear the NEW VACANT RESIDENTIAL STOCK in China (ignoring the existing occupied housing
stock) is about twice its GDP……in bubble value.
It would appear Jim Chanos ( refer - Charlie Rose - James Chanos, President, Kynikos Associates ) may well be right – or at least generally right. In normal markets, construction should hover around 6% of GDP. In
Ireland (population roughly the same as New Zealand) through the height of the bubble when 90,000 new units were built
per year ( a build rate of 20 / 1000 population), construction comprised in the order of 12 – 15% of Irelands GDP.
Chanos makes the extraordinary statement within the interview with Charlie Rose that Chinese construction peaked at 50 –
60% of its GDP.
The above does not include any comment on the malinvestments in the infrastructure and commercial construction sectors
of China. These are likely massive.
It seems clear that the name of the game in China has simply been a case of a command economy fixated on “making the
numbers” – the GDP growth ones in particular. Whether they are accurate, make sense or are viable, appears beside the
point.
Who is going to pay for this fiasco?
ENDS