The Journal published a piece this past week talking about China’s $52 trillion residential property bubble. According to a recent study by Goldman Sachs, this is the current value of all Chinese homes (built homes and developer inventory). And to put this number into perspective, it is twice that of the U.S. residential market.
Now, I don’t know all that much about the Chinese housing market and I have no idea where prices will go next. But it is interesting to look at some of the data, particularly in light of this current pandemic. Urban home prices in China were up 4.9% year-over-year in June, and 1.9% year-to-date. Shenzhen appears to be one of, if not the hottest market. Why is that?
At the same time, it is believed that about 21% of urban homes in China were vacant as of 2017. I don’t know what the figure is today, but this is a high number. As of last year, urban China also had a homeownership rate of about 96%. (Here is a look at how this number compares with other countries around the world.)
What is clear is that Chinese households are going long property, and eschewing other investments such as stocks and bonds. Above is a chart showing how China compares to the US, where bonds lead, followed by stocks. Presumably it is because property is viewed as a safer and more lucrative investment in China.
According to a report by China Guangfa and the Southwestern University of Finance and Economics, urban Chinese have on average about 78% of their wealth tied up in residential real estate. Many own multiple homes. In the U.S., this figure is about 35%. (I don’t know what the number is for Canada, but I would be interested to know.)
Call me old fashioned, but I think it’s important to keep in mind things like rental demand and cash flow when thinking of property.
All figures and charts from the WSJ.
I live on the north side of Shenzhen (near the Chinese telecom giant Huawei) and I’m renting a very modern and fully furnished three bed/two bathroom apartment in a high rise gated community for 5,500 yuan per month (about $800 USD). This community was developed and sold to a young couple in 2017 for 7.2M yuan (or $1.1M USD) and despite a 30% down payment (their parents helped), this young couple still has to shell out nearly $4,000 USD for their monthly mortgage payment. After renting their home to me they moved to a more expensive area in Shenzhen for a new job and are paying about $1,100 USD in rent for a 2 bedroom. The couple’s total monthly spending on their mortgage and rent is $5,100 yet they only collect $800 USD for their own apartment. I’m no housing expert but it sounds rather stupid to own a home when your “investment” can’t even return 1% of the property value on an annual basis. Keep in mind the per capita income in Shenzhen is only about $12,000 USD per year! People buy property here not because they need it or even want it, they buy it because their friends and families bought it and got rich from it. When the first generation of property speculators (read: every middle class family with more than 1 or 2 homes, which are many if not most) need to liquidate their holdings for retirement (which is about 10 years I think), it’ll be interesting to see what happens.