China: Big Bubble Trouble
5 January 2014
WHAT IS BEING LEARNED FROM HISTORY? …
Recently, Member of the European Parliament and Peruvian born and raised Daniel Hannan
(as part of his book launch for Inventing Freedom
) delivered an important speech at the Heritage Foundation in Washington DC. He reminding attendees of the history of
what is loosely termed the Anglosphere …
Around 250 years ago, Anglo-Irish statesman, political theorist and philosopher Edmund Burke
stated “Those who don’t learn from history are doomed to repeat it”.
Political systems are ultimately judged by their own people.
People demand performance.
China is very much in the spotlight now.
The major question following three decades of remarkable growth under its modified Communist system of government … is
it sustainable ?
THE IMPORTANCE OF THE DEMOGRAPHIA SURVEYS …
Late January every year, the Annual Demographia International Housing Affordability Survey
is released. The expanded 10th annual edition (data 3rd quarter 2013) is due for release Monday 20 January this year.
This Annual Survey ( employing the median multiple measure
) to date has assessed housing affordability of the major metros of what is termed the Anglosphere … United Kingdom,
United States, Canada, Australia and New Zealand, with Hong Kong and the Republic of Ireland as well.
As sufficiently robust data comes to hand, further countries will be added to this annual survey going forward.
If housing exceeds 3.0 times annual household income in a metro area, it is a strong indicator of institutional failure
at the local level.
In short, there are political impediments to land supply and infrastructure financing that need to be dealt with. This
allows normal housing markets to function and ensure that unnecessary and hugely destructive housing bubbles are not
Structural impediments are the housing bubble “trigger” … finance in all its forms (equity, bubble equity, mortgage
debt) is simply the “fuel”.
LEARNING FROM TEXAS … TELL MR HANNAN …
Year after year, the State of Texas illustrates why open land and sound infrastructure financing arrangements work.
Texas builds … but does not bubble.
How this happens was explained recently within a paper by the Real Estate Center of Texas A University … Land, lots of land: How Texas dodged the housing bubble
In one important respect. Mr Hannan remark following his speech to the Heritage people was wrong. He made the comment
that the “Anglosphere values’ are working better in Australia, New Zealand and Canada, than they are in the United
States and the United Kingdom.
The Annual Demographia Surveys illustrate that unaffordable housing and dysfunctional governance go hand-in-hand.
Clearly, Mr Hannan should have stated that Texas is where the Anglosphere system of governance is working best. The
numbers speak for themselves.
NEW LONDON HOUSING DURING THE DEPRESSION AT 2.0 TIMES INCOMES …
“ …. Obviously, for the cheap-money policy to work it needed to stimulate demand – a transmission mechanism into the
real economy was needed. One specific aspect of this is worth exploring, namely, the impact that cheap money had on
house-building. The number of houses built by the private sector rose from 133,000 in 1931/2 to 293,000 in 1934/5 and
279,000 in 1935/6 – many of these dwellings being the famous 1930s semi-detached houses which proliferated around London
and more generally across southern England.”
… and further …
“85% of new houses sold for less than £750 (£45,000 in today’s money). Terraced houses in the London area could be
bought for £395 in the mid-1930s when average earnings were about £165 per year. Houses were cheap because the supply of
land for housing was very elastic which in turn meant that there was no incentive for developers to sit on large land
banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning
restrictions which applied to only about 75,000 acres in 1932 – the draconian provisions of the 1947 Town and Country
Planning Act were still to come.”
In 1935, the population of the United Kingdom was some 47 million
, when 293,000 new homes were put in place. This represents … in the height of the Depression years, a build rate of
6.23 per 1000 population per annum. Remarkably, new housing was being supplied in London for 2.3 times household incomes
Astonishingly, at about 120,000 new residential units a year with its population of about 63 million, the United Kingdom
is currently putting in place less new homes than it did during the Depression years.
Adjusted for population changes it is even worse. Just 1.9 units per 1,000 population per annum … an inadequate level
for the replacement of aged and obsolete stock … let alone for increased population and household formation.
Appallingly, that’s less than a third of those Depression years!
The United Kingdom is an economic and social ticking time-bomb.
POST WW11 NEW AMERICAN HOUSING AT 2.0 TIMES INCOMES …
Soon after WW11, the creators of the modern housing production industry, brothers Bill and Alfred Levitt
supplied new homes of 80 square metres on 700 square metre lots outside New York for $US8,000 to young single earner
households on $US3,800 per annum … 2.1 times annual household incomes. US median household incomes were about $US2,500
at the time.
The all up costs (serviced lot and construction) were about $US100 per square metre building area.
LEARNING FROM HOUSTON …
Today in Houston, Texas, where median household incomes are about $US55,800 ( refer 2013 Demographia Survey Schedule 2 Page 42
) , new fringe starter housing is being supplied at around $US700 per square metre all up
( and here … Houston Area New Homes, Greater Houston Home Builders | NewHomeSource
… add garage space when calculating … approx. 6m x 6m = 36 square metres. Americans do not include this within the
“heated” building area).
So this provides a “fix” on what new detached fringe starter housing costs should be, adjusted for expanded household
incomes over time. That is, if housing markets are allowed to operate normally with adequate land supply and appropriate
Again … the numbers speak for themselves.
And too .. as Professor Shlomo Angel makes clear in his recent book Planet of Cities
, generally, there is no shortage of land available globally for normal urban expansion and development.
As the latest (November 2013) Houston Association of Realtors Monthly Report
illustrates, apartments / condos are approximately 20% lower cost than stand-alone detached housing (medians …
$US143,350 apartment / condo … $US181,000 stand-alone family housing).
While on a per square metre development cost basis, apartments / condos are more expensive to develop, this is
compensated for as the total floor areas are generally a third to a half the size of stand-alone detached housing.
So there is no reason for apartment / condo prices to exceed the price of standard detached housing … within the
Anglosphere and indeed elsewhere.
WHAT ABOUT CHINA? … START WITH HONG KONG …
How are they faring in China? Let’s start with Hong Kong.
As the 2013 9th Annual Demographia International Housing illustratesAffordability Housing Survey
illustrates, housing in Hong Kong is a staggering 13.5 times annual household incomes … the worst of the 337 metros
The recent repeat protests in Hong Kong
would suggest its citizens are not likely to tolerate the lack of democracy and exorbitant housing and living costs
CHINESE AUTHORITIES DEEPLY CONCERNED ABOUT HOUSING …
Clearly the Chines authorities are deeply concerned about housing issues, as the Government news agency Xinhua made
clear just prior to Christmas …
… providing an indication of the extent of the bubble pricing … excerpt …
“Despite the government's firm stance in curbing the market, ordinary Chinese people in most cities are still facing
relentlessly rising housing prices. This has added to the risk of a price bubble and social instability as housing
becomes increasingly unaffordable.”
“The average ratio between home price and income, an index indicating the degree to which housing is affordable by the
local population, stood at 8.3 to 1 for 35 major Chinese cities in 2012, higher than the world's average level, said a
report by Shanghai-based E-house China, a leading real estate service provider.”
“The ratio reached 13.3 to 1 in Beijing, the report said, which means purchasers need to work at least 13 years to pay
for a home. The World Bank considers the ratio of 5 to 1 as affordable, while the United Nations set the standard at 3
“Housing prices in first-tier cities have far exceeded local residents' purchasing power. Home buyers have to draw on
savings of their parents and grandparents, which will increase the income gap, reduce people's spending and cause
old-age care problems, said Zhu Zhongyi, deputy head of the China Real Estate Industry Association.”
“In contrast to red-hot areas, there are inland cities like Erdos and Anshan City in north China, which are dubbed
"ghost cities" as residential apartments remain empty.”
“Lin Bo, an analyst at the Shanghai-based China Real Estate Information Corporation, said housing supply has been
accumulating and has reached a peak in many such cities this year. The oversupply has pushed up the risks of a market
collapse because of inadequate demand.”
“Meanwhile, over-crowdedness, traffic jams, pollution and strained school and hospital resources in big cities have also
fueled complaints of a worsening urban environment.”
It is critically important when providing Median Multiple housing data, that the median house prices and median
household incomes are provided with the Median Multiples. It is hoped E-House provides this critically important data as
soon as possible, so the Median Multiple figures can be scrutinised.
Back in 2011, the International Monetary Fund within its report on China, provided a “house price to incomes” assessment
(again… without supporting data) for China overall, its major metros and those of other countries as well (refer graphs
and tables Page 9) ..
There is widespread concern about the structural problems of the housing markets of China.
ANNE STEVENSON-YANGS IMPORTANT PERSPECTIVES …
, Co-founder and Research Director of J Capital Research
has been extremely candid and indeed courageous in expressing her concerns about the Chinese housing market, as
explained within an October Forbes article
. And too, on the political realities, as she sees it, outlined within a recent client newsletter
The problem for any researcher on China (such as this writer) is that sadly too often, the data / information is
dubious, conflicting, inadequate and as we would say in the trade (this writer is a former commercial development
practitioner and former industry leader … refer brief biography at the end of the Annual Demographia Survey
and archival website Performance Urban Planning
) is that “the numbers just don’t stack up”.
In navigating ones way through the “confused muddle” of information available on China, and based on ones judgement as a
former successful development practitioner, industry leader and researcher / advocate on these issues, this writer is of
the view Anne Stevenson-Yang’s research and perspectives need to be taken seriously.
Indeed she deserves applause for her courage and candour.
CHINA … LESSONS FROM IRELAND …
It would appear the Chinese housing market, with its grossly distorted over-production, has similar characteristics to
Irelands housing bubble, which peaked in 2007. As the 2008 4th Edition Demographia International Housing Affordability Survey
illustrates, the Median Multiple overall for the major Irish metros was 4.7 …. with its capital Dublin at 5.3 Median
The “Multiple Stretch” (more elevated pricing) and its scale in China are considerably more dangerous.
It is now possible to assess the social and economic consequences of the collapse of the Irish housing bubble. Reuters
recently explained aspects of this … Hoping to be bankrupt by Christmas (video)
STRUCTURAL URBAN ECONOMICS APPROACH ESSENTIAL …
A structural urban economics approach (with the Demographia Survey Median Multiple approach) in assessing housing
markets and getting sound public policies in place is essential … as this writer explained back early 2008 with Getting performance urban planning in place
The destructive costs and consequence of unnecessary housing bubbles need to be better understood.
Too often, the reporting by those from the finance sector and economists too ( refer … Housing Bubbles & Market Sense
) is superficial, lacking any essential understanding of the critically important structural aspects of housing
A housing market is heading in to unnecessary “bubble territory” when prices exceed 3.0 times annual household incomes.
A simple structural definition of an affordable housing market is …
“DEFINITION OF AN AFFORDABLE HOUSING MARKET”
“For metropolitan areas to rate as 'affordable' and ensure that housing bubbles are not triggered, housing prices should
not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable
quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the
urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey
Schedules for guidance).”
“The critically important Development Ratios for this new fringe starter housing, should be 17 - 23% serviced lot /
section cost - the balance the actual housing construction.”
“Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing
Multiple of 2.5 to a Ceiling Multiple of 2.7 - to ensure maximum stability and optimal medium and long term performance
of the residential construction sector.”
HOUSING BUBBLE PROBLEMS ARE WIDESPREAD …
In this regard, New Zealand is the world leader in getting pragmatic and workable solutions in place. At the other end
of the spectrum is California, the epicentre of the Global Financial Crisis, that has yet to start a public conversation
on these serious issues. Instead, California is well on the way of setting off another destructive housing bubble.
The greatest advantage China has is the courage and candour of its people. The conversations both within and outside
China with its “bubble problems” are critically important part in exploring pragmatic and workable solutions.
Indeed … if we in the Anglosphere had the courage and candour of the Chinese people … and had learnt from our own
history as Edmund Burke told us 250 years ago (and others too
) … we within the Anglosphere would not be in this “housing pickle” today.
Thje Chinese people respect history. It is past time we did in the Anglosphere too.