2014-04-24

The Two Views on China's Housing Market

The view offered by Halpin below is really the key to bull case that there's plenty of housing demand in China.

Does China have a housing bubble? Here’s why nobody knows for sure
Quantity is only half the story, though, says Rafael Halpin, an analyst at China Confidential. “You could argue quite easily that there has been excessive buildout—that the current supply is sufficient—if you’re looking purely in terms of the number of houses in China,” Halpin tells Quartz. “But you have to take it a step further and say, ‘What is the quality of those houses?’”

Before 2000, homes were built to be sold cheaply to poor and middle-class families. In addition to being small and spartan, these flats often included kitchens or bathrooms shared with the entire floor—no longer acceptable to today’s rising middle class.

Still, many of the sub-par homes are centrally located, so they’re convenient enough that many families still live in them, saving money to invest in posh apartments for themselves or their children. What’s more, families hang on to them when they upgrade to fancier digs, unable to sell and waiting to be bought out by developers when the land parcel sells. As of the end of 2011, around 47% of China’s overall housing stock is such “crappy legacy housing,” says Halpin. He estimates that, of housing stock used as a primary residence, only around one-third of home owners are living in “commodity houses”—i.e. those purchased and sold on the market—with the remainder either social or legacy housing.

Subtract that housing stock, then, and it turns out China might actually have a housing shortage. That’s why “you still have very strong demand for people wishing to upgrade,” says Halpin. And surging prices.

Zhang Zhiwei, head economist at Nomura, disagrees. Rapid construction in the last five or so years has dramatically changed the quality of China’s overall housing stock, he said in a recent note. While pre-2000 homes made up around 53.2% of the total in 2007, that figure had dropped to 22.4% in 2013, calculates Nomura, and will fall to just 9.1% by 2017 if developers keep building at the current rate.

See also: Why we won’t know what’s up with China's real estate bubble until it's too late
Some pre-2000 buildings are also literally falling down. On April 4, a 20-year-old residential building in Zhejiang suddenly collapsed, killing one person and injuring many others. At least six multiple-story buildings have collapsed in a similar manner since 2009.

In 2010, a Ministry of Housing and Urban-Rural Development expert said that buildings in China “only last 25 to 30 years,” compared to an average of about 74 years in the US. As of 2011, according to Halpin, almost half of the country’s total housing stock was “crappy legacy housing.” He argues that only a third of current homeowners live in “commodity houses” — those bought and sold on the market — with most Chinese still in social or legacy properties.

China's housing sector is crumbling – literally
To Qiao Runling, deputy director at China's top planning body, the National Development and Reform Commission, the short lifespan doesn't simply indicate how long the housing is livable in but how long developers wait to tear down one project in order to raise a more expensive one

“Chinese like to demolish buildings just so they can build new ones,” Qiao said, speaking at a real estate investment forum in Shanghai last week.

The buildings aren't torn down because they're dangerous but rather because local officials want to drive the economy with new construction projects. It's “political willingness” that often cuts short the life of many otherwise healthy buildings, Qiao said, “The local government wants to stimulate GDP growth and they choose the crudest way to do this: Demolition then rebuilding.”

The practice isn't just a waste of valuable real estate, it's a major polluter and consumer of energy. The energy needed to fuel China's construction industry accounts for about one-third of the country's total energy consumption, Qiao said. Where energy consumption is high, so is pollution. The unceasing cycle of building and demolition adds to China's already dire environmental conditions. On top of that, China has little capacity to reuse construction waste, unlike countries such as Japan. Some reports say that construction refuse has literally encircled cities like Hangzhou.
Most importantly it destroys capital!



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