EIU Building Rome in a day: The sustainability of China's housing boom

Building Rome in a dayThe sustainability of China’s housing boomA report from the Economist Intelligence Unit’s Access China service

www.eiu.com

Building Rome in a dayThe sustainability of China’s housing boom

© The Economist Intelligence Unit Limited 20111

Executive summary

C hina is not facing a major housing bubble, although there could be a short-term mild correction. The Economist Intelligence Unit’s new models of population and incomes in China’s cities point

to strong underlying demand for housing throughout the next decade. They indicate that housing demand in China is growing so quickly that a correction in the next couple of years will be short-lived.

At current rates of construction, China can build a city the size of Rome in only two weeks. In the decade leading up to 2010, China built houses equivalent to roughly twice the total number of houses currently in Spain or the UK, or about the same number as Japan’s current total housing stock. In per head terms, the average amount of floor space per urban Chinese person has doubled over the same period. Chinese floor space per head is already high by international standards, given the country’s income levels. However, China’s urban population is forecast to continue to grow until 2039. As a result, rather than pointing to a collapse or a plateau in housing activity in the next decade, growth rates should remain strong, although they should steadily ease.

Between 2011 and 2020, we expect China’s urban population to increase by 26.1% or over 160m people, while urban per head disposable incomes will increase by 2.6-fold to Rmb51,310 (about US$7,500 at current exchange rates). Residential floor space per head in urban areas will increase from 30 sq metres (in 2008) to 41 sq metres by 2020.

China’s housing boom will present opportunities for investors in sectors such as furniture, cars and building materials. The cumulative value is substantial—using the Chinese fixed asset investment measure, we expect a total of Rmb75trn to be spent on real estate investment over the decade to 2020. This equates to US$11.5trn at today’s exchange rate, an amount equivalent to almost five times the total current annual GDP in the UK.

Continued strong growth in the housing sector over the decade to 2020 will also lead directly and indirectly to almost 40% growth in demand for steel and similarly strong growth in energy demand, putting increased pressure on global markets for iron ore and oil.

We do not include a forecast for house prices in this report, but real estate assets in renminbi are likely to be one of the best-performing global asset classes over the next decade. A combination of urban population growth, real income growth and exchange-rate appreciation underpin this assertion.



Soaring house prices in Chinese cities have led to widespread concerns over a Dubai-style property bubble. In an economy that is building as much housing each year as there is in all of Spain (nearly

2bn sq metres), the repercussions of a major collapse would be severe enough to send the world into a mini-recession and to cause serious damage to resource-focused economies.

Fortunately, such concerns are overblown. Although China’s housing sector is likely to face a correction in the short term, underlying demand—driven primarily by incomes and urban population growth—for bigger and better housing is growing so rapidly that such an adjustment would be short-lived. China’s unique demographic circumstances also go some way to explain why demand for housing has been so explosive. Burst housing bubbles, for example in Japan and the US, occurred in countries with stable demographics and without strong longer-term growth prospects.

Perhaps Rome cannot be built in a day. But at China’s current rates of construction, it would take roughly two weeks. It took the Asian hyper-economy roughly a decade to build the equivalent of

China’s love affair with property

China: building Europe in 15 years (sq m; m)

Sources: UNECE; Eurostat; National statistics offices.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Newly completed residential floor space (China)Residential floor space stock, various countries

GermanyFranceItalyUKSpainTurkeyNetherlandsPolandGreecePortugalSwedenCzechRepublic

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

Note. Residential floor space completed in China, 1999-2000 = 17,354m sq m. Existing residential floor space of 12 countries shown = 17,500m sq m.



Europe’s entire housing stock (excluding Turkey), and there are few signs that the seemingly insatiable appetite of Chinese consumers for bigger and better housing will slow substantially.

Since property markets were liberalised (previously, all property belonged to the state) in the late 1990s, dabbling in real estate has become something of a national sport. The last published large-scale population survey, conducted in 2005, revealed that 88% of households lived in self-owned housing, one of the highest such rates in the world.

In per head terms, the average amount of floor space per urban Chinese person has doubled over the same period. With 41.6bn sq metres of residential floor space in place in 2009, China already has the world’s largest stock of housing. That may seem unsurprising for a country with 1.3bn people, but Indian residents, numbering over 1.1bn, enjoy less than one-half of the total living space of their Chinese counterparts.

In 2010 new residential floor space completed in China reached 1.8bn sq metres, slightly less than the entire housing stock of Spain. Likewise, it took China approximately 15 years to build the equivalent of Europe’s entire housing stock.



What truly stands out, however, is that China’s average living space per head, at just over 30 sq metres, is extraordinarily high, given the country’s current income levels. The graph below shows the relationship between GDP per head (PPP) and residential floor space per head. The line represents the best-fitting curve for the 35 countries depicted.

Countries lying above the curve, such as the US, have relatively high levels of living space per head, while those below it show the opposite tendency. Japan, for instance, stands out as being a rich country with relatively small properties. According to the curve, a country at China’s level of GDP per head (PPP) “ought” to have 20.3 sq metres of living area, which would mean that China is 53% “overhoused”. By contrast, the US is only 15% overhoused.

Clearly, there are more factors than income that determine living space across countries. Population density, for instance, plays a prominent role. Japan’s population density is over ten times that of the US and nearly three times that of China, going some way to explain why Japanese people live in such small spaces (capsule hotel, anyone?). But even after controlling for population density, China remains the most overhoused country among the 35 listed.

What are the causes and implications of “overhousing”? This is a difficult question to answer. It

Too much housing?

Selected household indicators, 2010,a

India China Russia UK Japan US

Urban population (% of total pop) 30.1 44.9 72.6 90.0 66.8 82.3

Households 223,340 396,010 53,930 26,140 50,200 115,990

Average no. per household 5.3 3.3 2.6 2.4 2.5 2.7

Residential floor space per head (sq metres)b 10.5 31.0 – 35.5 33.3 64.6

Personal disposable income (per head, US$) 1,110 1,870 6,050 23,970 26,080 35,970a Data for some countries are Economist Intelligence Unit estimates.b Owing to limited data availability, residential floor space data are for 2000-06, depending on the country.

Source: Economist Intelligence Unit.



could simply be the case that Chinese prefer large apartments to other goods and services. However, there are also a number of noteworthy characteristics in Chinese society that may account for the country’s housing exuberance:

l Property sector taxation: The absence of a significant nationwide property tax, such as that enforced in most other countries, greatly boosts the attractiveness of real estate in China. China has just begun to experiment with property taxes, but as they are currently at such a low level they are having minimal impact.

l Small households: The average size of a Chinese household is 3.3 persons (2.8 for urban households), which is relatively low for a developing country. The one-child policy has clearly played an important role, but ageing will also contribute to the growth of single households (men tend to die earlier than women), as will the gender imbalance and changing family values. The number of single-member households in China increased from 8.3% of total households in 2000 to 10.7% in 2005.

l Gender imbalance: China has the world’s most skewed gender ratio among young people, which has multiple implications for housing. A small but thorough pool of researchers contend that gender imbalance, combined with a materialistic approach to marriage, is the reason behind China’s high household savings rate. A higher ratio of men to women in China means that the latter can be more selective about their spouses, while the former must try harder. Young men thus save feverishly, often

Growth and house size (circle area represents total residential floor space stock)

Sources: UNECE; Eurostat; National statistics offices; Economist Intelligence Unit estimates.

0

10

20

30

40

50

60

70

80

0

10

20

30

40

50

60

70

80

60,00050,00040,00030,00020,00010,0000GDP per capita (US$ PPP)

Resi

dent

ial f

loor

spa

ce p

er c

apit

a (s

q m

)

Residential floor space per capita (sq m)

US

Luxembourg

India

JapanChina

Germany



with the help of their parents, to be able to offer their desired partners a suitably impressive home.

l Building quality: While Chinese citizens enjoy living space that is almost on a par with their much richer Japanese counterparts, the quality of buildings is likely to be on a different level. It is difficult to obtain objective benchmarks on building quality across countries, but anecdotal evidence from China certainly suggests lower-quality construction. According to Pan Jiahua, a researcher at the Chinese Academy of Social Sciences, the average lifespan of a Chinese building is 30 years, compared with 132 years in the UK. “Tofu projects”, as they are known, became the subject of much public consternation



following the 2008 Sichuan earthquake. Shoddier construction holds costs down, so it is quite possible that there is a trade-off between home size and building quality.

China’s construction boom moves inland

Source: National Bureau of Statistics.

33 to 3630 to 3327 to 3024 to 27Less than 24No data for ethnicautonomous prefectures

Above 36

Residential floor space per head in 2009 (urban, sq m)



In our 2010 report, CHAMPS: China’s fastest-growing cities, we used our demographic and macroeconomic models covering 287 Chinese cities to show both the broad scope and rapid pace of

growth of Chinese cities over the next ten years. Here we again use our models to answer the question of what this growth means for China’s housing boom—will it be sustained and where will it occur? We then show what this boom means for China’s total demand for steel and energy, developments that will shape global markets over the coming decade.

Within China, there is a huge variation in living space per head between cities, starting at the top with Dongguan, an export manufacturing boomtown, at 54 sq metres per head, and finishing at the bottom with Suihua, a freezing rustbelt town, with 18 sq metres.

In general, cities in the north tend to find themselves on the lower end of the living space spectrum, primarily because colder temperatures make larger houses more costly to heat. Incomes and property prices clearly play an important role in determining the size of houses, but so does the weather.

Larger cities in China also tend to have less living space per head, which is a trend seen across the world. Cities such as Beijing, Shanghai and Guangzhou are all below the national average in per-head floor space, and this is likely to remain the case given their increasingly crowded conditions.

China’s vision of a “well-off society”, as articulated by the Ministry of Construction in 2004, includes a target of 35 sq metres per head by 2020. Today, that goal looks well within reach. A number of cities have

2012 2013 2014 2015 2016 2017 2018 2019 2020

HuanggangYulin

ShangqiuZhoukou

TaizhouTianjin

Chongqing

XuchangBaotou

YangzhouQuanzhou

Linyi

ZhongshanXinyangJinhua

JiujiangYueyangNanningNanyangFoshan

Changsha

XiangtanLianyungang

AnyangZhumadian

GanzhouHezeZunyiXi'an

Zhengzhou

HuaianZhenjiangChangdeJiaxing

XiangyangPingdingshan

LiuzhouSuzhou

HangzhouWuhan

Chengdu

LiaochengJiaozuoQujing

XinxiangXianyangMianyang

HohhotCangzhou

ChangzhouWuxi

DezhouNanchongHuaihua

ShangraoShaoxingJieyangNantong

HengyangLuoyangWeifangHandan

NanchangKunmingNanjing

Shijiazhuang

Cities becoming “well off” in the next decade(exceeding 35 sq metres per head in living space per head)

Note. Only prefectures with a forecast urban population of over 2m by 2020 are shown.



already exceeded the target, and a lot more will do so within the coming decade (see diagram above).Urbanisation and income growth will act as the main drivers of growth in housing demand. As

incomes rise and ownership of cars escalates, accessibility will become less of an issue and cities will begin to sprawl, which in turn should drive increases in home sizes as space becomes less scarce.

The table below shows the top ten cities, ranked by the expected net increase in urban residential building stock for the coming decade. To illustrate the scale of construction, a simple comparison shows that the expected increase in each of these cities over the ten-year period is equal to the existing residential floor space stock of a number of European countries.

Regions with high urban populations will still lead construction activity, but a number of lower-tier, lower-income regions such as Chengdu will grow in prominence. This is primarily because large rural populations in these regions will provide for strong rates of urbanisation.

Moreover, China is entering a period where economic growth in inland regions is overtaking that of coastal regions. As manufacturers seek alternatives to the rising costs of labour and land in the Pearl and Yangtze River deltas, a number of inland cities, including Wuhan, Chongqing, Chengdu and Xi’an, have been on the receiving end of a series of relocation moves by manufacturers. This is contributing to faster job and income growth in the region. Coastal provinces, however, are facing a period of adjustment that will see exports increasingly take a back seat in driving growth.

Forecast net increase in urbana residential building

stock, 2011-2020 (m sq metres)

Existing residential building stock (various years; m

sq metres)

Chongqingb 1,109 Poland 807

Chengdu 447 Greece 494

Zhengzhou 396 Portugal 424

Tianjin 389 Sweden 411

Beijing 350 Czech Republic 369

Xi’an 279 Romania 366

Changsha 272 Switzerland 352

Shanghai 271 Hungary 319

Shenzhen 265 Austria 318

Dongguan 234 Denmark 282a Figures are for urban areas within referenced prefecture/municipality.b Chongqing municipality’s unusually large increase partly reflects its large size compared with other prefectures.

Sources: National Bureau of Statistics (China); UNECE; Economist Intelligence Unit forecasts.



China’s relatively large stock of housing per person raises the question of whether building has already gone too fast and will soon plateau, eliminating real estate as the driver of Chinese growth.

Our models of underlying demand point to a relatively stable, albeit more subdued, long-term outlook.

Risks and the impact of housing on steel and energyChina’s property sector is the main driver of the economic cycle. If residential investment slows in 2011, so will the Chinese GDP growth rate. China’s GDP slowdown in 2008-09 was driven not by the global financial crisis but by domestic tightening policies in response to overheated property markets.

What could go wrong?

Outlook for housing construction demand in China, 2011-20

Drivers

l Urban income growth per head: CAGR forecast at 9.8%

l Urban population growth: CAGR forecast at 2%

l Demographics: Falling number of inhabitants per household; increase in single-member households; gender imbalance

l Rebuilding: Short building life spans imply high rebuild rates

l Rising car ownership will increase available space and restrain price growth

l Headroom for increase in mortgage-backed buying

l Relatively low population density suggests per head floor space will stabilise at relatively high rates

Risks

l Policy: Nationwide roll-out of property tax, although government is likely to introduce policy with caution

l Monetary tightening: Could trigger short-term housing downturn if administered in a heavy-handed fashion. Only likely if inflation becomes a serious concern

l Macroeconomic risk: Property remains the key macroeconomic risk; however, central government finances are relatively healthy and alternative sources of revenue such as state-owned enterprise profits could still be tapped

l Current vacancy rates: Emerging gap between housing starts and sales suggest short-term correction may be overdue



It is also increasingly important for other global sectors. Chinese demand is crucial for determining global prices of key commodities ranging from iron ore and oil to aluminium and copper.

Any attempt to assess the impact of China’s ongoing housing boom on global markets by the use of inputs such as steel and energy in housing construction will result in only a gross underestimation. As a broad driver of economic activity, housing construction sets off a range of indirect demands for commodities and energy that are important to measure. For example, housing construction is closely linked to demand for cars, as new home owners in more affordable satellite towns rely more on cars for commuting. The resulting increase in demand for cars requires further inputs of steel and energy.

Our detailed econometric models of China enable us to forecast what a given level of housing activity means for demand for total steel and energy. Over the five years to 2014, as floor space per capita head rises by 25%, steel demand will rise by 22% and energy demand by around 50%. This will have a dramatic impact on global markets. The main winners will be countries exporting iron ore and oil, while consumers everywhere will face relatively higher prices. It is important to bear in mind that this is not a zero sum game, however—although China will put pressure on global commodity supplies, it will also be growing as an export market for the rest of the world.



Despite rapid growth in house prices in China, the real estate market is not a bubble about to collapse. The government’s tightening measures directed at the property market will, at worst,

lead to a short-lived downturn. Continuing urbanisation and steady growth in incomes will underpin strong demand for housing, although trend growth rates are likely to slow. The government is now running trials of a new property tax, but it is not short of revenue and could do without setting off tax-inspired political discontent. As such, we do not expect a broad property tax at a rate that would threaten the strong outlook.

China’s ongoing demand for housing has many important implications for business. The global commodity demand set off by China’s housing industry will continue to underpin commodity prices, particularly for steel and oil. Our models for forecasting population and incomes in China’s cities show where, by how much and when the demand for floor space takes off. Hot spots include the rapidly rising cities away from the coast, largely in central and north-east China.

Within China, the housing industry is associated with broad opportunities in construction, retail and transport. When viewed at the city level, the opportunities are spread over dozens of lesser-known inland cities and will develop rapidly. Businesses that can quickly and objectively weigh up opportunities across the hundreds of cities in China will be ahead of the competition.

China does have a high level of per-head floor space given its income levels, but this does not point to a structural collapse of housing demand. China’s love affair with housing is driven by cultural factors linked to the gender imbalance, and relatively light taxation of housing as an investment. Neither of these factors is likely to change significantly this decade.

Conclusion

While every effort has been taken to verify the accuracy of this information, The Economist Intelligence Unit Ltd. cannot accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in this report.

Cover image - © Hemera/Thinkstock

LONDON26 Red Lion SquareLondon WC1R 4HQUnited KingdomTel: (44.20) 7576 8000Fax: (44.20) 7576 8500E-mail: [email protected]

NEW YORK750 Third Avenue5th FloorNew York, NY 10017United StatesTel: (1.212) 554 0600Fax: (1.212) 586 1181/2E-mail: [email protected]

HONG KONG6001, Central Plaza18 Harbour RoadWanchai Hong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: [email protected]

GENEVABoulevard des Tranchées 161206 GenevaSwitzerlandTel: (41) 22 566 2470Fax: (41) 22 346 93 47E-mail: [email protected]

EIU Building Rome in a day: The sustainability of China's housing boom

Documents

Transcript of EIU Building Rome in a day: The sustainability of China's housing boom