China’s Property Balancing Act

Pudong Skyline – JSolomon

With fears of both a bubble and an economic slowdown, China must carefully manage residential real estate

In Shanghai last October, a group of around 400 newly minted homeowners took to the streets after their property developer made steep price cuts, exceeding 25 percent according to one report. The group demanded refunds, waved a banner and eventually damaged one of the company’s showrooms. Refunds were never offered, and they didn’t receive much sympathy from a Chinese public that has been largely priced out of home ownership the past decade. It was a decidedly minor incident, indicative of only one side of the problem, but that didn’t stop some from seeing it as a preview of the collapse to come.

The seemingly precipitous drop in Shanghai residential real estate was the deliberate result of recent national policies designed to curb the perceived property bubble growing since the mid-2000s. According to The New York Times, Shanghai prices rose by more than 150 percent between 2003 and 2010, making housing unaffordable for many residents, particularly the young. Measures introduced early last year to avoid a potentially calamitous bubble included restrictions on the speculative purchase of multiple properties, an increase in home buying requirements and a massive government program to build more low-income housing.

With the subsequent nine-months of relatively slow and even-keeled decline in the country as a whole, isolated demonstration notwithstanding, the policy seemed to be working. That is until a relatively sudden up-tick in June.

Not So Simple

Real estate occupies a special place in the growing Chinese economy, and as such there are concrete reasons to worry over residential real estate price jumps in either direction. On the one hand, housing in big cities at 20-30 times the average Chinese income is clearly unsustainable, a fact that Premiere Wen Jiabao has acknowledged by repeatedly stating his commitment to price-dropping, anti-bubble policy tactics.

But on the other hand, property development is an outsized portion of China’s GDP, all told between two and three times that of most western countries. This year’s worrisome slowdown in China’s growth is seen as largely due to precisely those policies, the resultant drop in raw materials production and, perhaps worst of all, corresponding losses in jobs. With the weak U.S. recovery and Europe on the brink, a slowdown any deeper than the April-to-June period’s 7.6 percent growth figure threatens the entire global economy.

But it’s important to remember that situations can change rapidly inChina, and no matter what happens, somebody, somewhere will predict imminent disaster. In May, a blog post by a prominent professor at Tsinghua University’s School of Economics and Management argued that China’s real estate market was unraveling, with sales falling over 20 percent January to February. Later in July,China’s National Bureau of Statistics reported a home sales increase of 41 percent May to June, with prices at an 11-month high. Talk of re-inflating the dangerous bubble promptly resumed.

If it sounds like things might be somewhere in the middle, they probably are. Indeed, China Business Times reported in late June that housing prices in first-tier cities are virtually the same as two years prior, to the disappointment of many young would-be homebuyers. But all things considered, that’s quite a bit better than some alternative situations, and nobody turned out to protest.

Moving forward, China must strike a delicate balance of stable, affordable housing without losing the critical GDP growth provided by construction. That’s no easy task, but with Beijing’s ongoing commitment to curbing dangerous speculation while building up low-cost housing, it’s clear the rudder is pointing in the right direction.

– Tom Nunlist


  1. It’s important to keep in mind that while property sales reportedly rebounded in June and July, the decline in new starts deepened, with starts falling -16.3% YoY in June and -26.7% in July, and land sales falling -22.4% and -39.0%. As a result, growth in real estate investment — which has been a key factor in sustaining GDP growth — continued its fall from -27.9% last year to 11.8% YoY in June and 9.6% in July. The figures on floorspace under construction suggest that there is about 1.6 years’ worth of excess inventory in the pipeline. With office and retail in particular, there is over 7 years’ worth of sales in the construction pipeline, a very alarming overhang.

    • Tom Nunlist says:

      Thanks for the additional stats, Professor. I’m significantly more alarmed now…

      With an eye toward fixing the problem: SOHO recently announced that it will be shifting toward renting properties (albeit in office space, not residential). Assuming the property sales rebound is indeed temporary, do you see potential in residential developers switching to rental property as a way to generate some revenue? If so, would it be enough to allow continued construction at a readjusted pace? My knee jerk is that, esp. given cultural attitudes to property ownership, demand for renting high-end apartment space may not be so high… Would love to hear your thoughts on that.

      Also, really looking forward to Parts 4 and 5 in your real estate series.

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