Chinese Housing - Blowing Bubbles
- David Munro, Consulting Market Strategist for OANDA Asia Pacific
January 30, 2012
NY Times 2005: "China Builds its Dreams and Some Fear a Bubble"
"Indeed, prices have risen so fast over the last few years and the pace of building has been so furiousÉ that the government and some leading economists have been warning about a huge property bubble in China."
NY Times 2010: "Market Defies Fear of Real Estate Bubble in China."
"Signs of exuberance are everywhere. An investor in Shanghai recently bought 54 apartments in a single day."
The West, as represented by NY Times reporting, displayed its ignorance of Chinese housing demand back in 2005, and then resolved itself to superlatives and incredulity in 2010 when the oft-predicted housing bubble failed to materialize.
Indeed, the possibility that some fabulously wealthy yet undoubtedly misguided investor could justify for purchasing 54 apartments in a single day was too much for even the most adventurous western property speculators to imagine. This was clearly rampant speculation in the extreme.
Upon relaying this story to a Chinese businessman and waiting for his surprised reaction, I learned that the employment market was so tight in some Chinese cities that employers offered apartments and cars as incentives to sign on. The businessman in the NY Times article did not manage to buy enough apartments to provide for all of his new employees. The purchase of 54 apartments, which initially appeared to be a speculative excess, was just a prudent (but insufficient) employment incentive.
But the West was not alone in reporting Chinese housing bubble-mania. China was caught up with the same fears. In 2007, China's Xinhua News Agency reported Chinese "Cities in Danger of Housing Bubble" and cited a high price-to-rent ratio for second-hand housing as the reason. Apparently, the ratio had exceeded the international warning line in many cities.
Defining Housing Demand
Rising demand for real estate was evident all over China. Yet defining that demand proved elusive. How many people of house-buying age exist in China? How many would buy? How many had already bought? When would the buyers become sellers?
The Japanese found answers to these questions when their housing market collapsed in 1990. The Americans were next to discover the secret to housing demand and supply in 2005. China (and Germany too - but that's another story) will find the answers in 2012.
The 40 to 49 year old age group typically spends the most money on residential real estate. Smaller starter homes are purchased when young parents and investors are in their 30's. There is true demand in this age group, but the total sums invested are relatively small. Home owners in their 40's upgrade to larger homes and buy second (or 3rd or 54th) homes as investments when their wealth and families grow. Upon reaching the half-century mark, your desire to assume risk wanes. A large home becomes more of a burden than a benefit and many in this age group scale down to smaller homes. Real estate portfolios are lightened. Fifty-year olds tend to be suppliers of residential housing, not buyers.
I have been presenting the following chart of the Chinese 40 to 49 year old population at talks for the past couple of years. It shows an incredible 43% increase in the dominant home-buyer demographic from 2001 until 2011. How could the NY Times, Xinhua, The Economist, the China Daily and almost every economist and hedge fund manager predict a Chinese housing bubble with the home-buying demographic soaring skyward? An average of 8.7 million new Chinese 40-49 year olds became potential home-buyers every year from 2003 to 2011.
Note what happens from mid-2011 to mid-2012 (the blue dots represent the middle of the year). The number of new 40-49 year olds will increase by just one million from a record addition 14.3 million in 2010. Builders and speculators were expecting demand to continue growing at the rapid pace of previous years, but it has come to a complete halt. From mid 2012 until mid 2013, the 40-49 home-buying demographic will fall by 5.1 million people - the first drop in twelve years.
Yes, the government was proactive in introducing measures to cool property markets, a measure of prudence that was conspicuously absent in the West. Additionally, down payments are relatively high in China, and the capital requirements are more stringent for second and third properties. Because of these measures, one could argue that the Chinese property market was in less of a bubble than widely believed. Before we look to the future of Chinese property demand, let's first see how the 40's home-buying demographic influenced housing markets in the US and Japan.
US Home Buyers Re-Surface in 10 Years
Taking the 42 to 50 year old demographic in the US, and using birth data so net migration is absent from the picture, the home-buying demographic peaked in 2005 after a 25-year rise. In 1981, New Home sales were 436 thousand and there were just over 24 million in the home-buying demographic. By 2005, 1.28 million new homes were sold and the home buying demographic had almost doubled to 42 million. The baby-boomers (peak birth year 1957) were just turning 48 years old in 2005 and apparently decided it was time to stop buying large homes. This demographic stops falling around 2016 and then turns up again in 2021 with much force thanks to the echo baby-boomers.
Japanese Home Buyers
The 40's home-buyers peaked in 1990 and then fell with force from 1995. Interestingly, 1995 was also 48 years from the peak birth year of 1947. Japan had a very short post-war baby boom that resulted in 8 million new babies from 1947 to 1949. The residential price index of the six largest cities fell off a cliff in 1991; just one year after the home-buyer demographic peaked. Now back to China.
Look Out Below!
OK, it may not be that bad. As we mentioned earlier, the Chinese government took measures to slow property price growth and, despite the undocumented lending market, down payments were generally substantial. But the chart of home- buyers suggests a cataclysm. Eighty million Chinese leave the prime home-buying demographic over the next 12 years. It is difficult to imagine how housing prices could possibly stay bid with so many home-buyers disappearing.
The Chinese home-buyer demographic has gradually expanded from 40 to 49 years of age down to 27 to 49. This was largely due to parents and grandparents helping out young adults with down payments to buy homes they would otherwise be unable to afford. Due to the gender imbalance, women are now able to define the rules of mating and will only entertain young men that come with houses.
On a positive note, strong home-buying demand is expected to re-emerge in 2025 from the 248 million babies born in the 1980's.
If the US and Japan are any example, Chinese residential property prices could be in for a decade of weakness. Those calling for a bubble since 2005 will finally be vindicated, despite having missed out on rapidly rising prices for the past six years.
The Chinese have largely shunned equity markets since the Shanghai Composite's spectacular 72% drop in 2007/2008. The majority of their wealth has been tied up in real estate, which admittedly has been the better choice until now. Perhaps some real estate risk capital will find its way back into equities and the average Chinese portfolio mix will become a little more diversified.
It is interesting to note that 48 years after 1963 - the peak year of Chinese births when 30 million babies were born - is 2011. Germany's peak baby production year was 1964. You do the math.
- Blowing bubbles picture: http://chicago-freedom-forum.blogspot.com/2010/03/blowing-bubbles.html
- NY Times 2005 quotation: http://www.nytimes.com/2005/10/18/business/worldbusiness/18bubble.html?pagewanted=all
- NY Times 2010 quotation: http://www.nytimes.com/2010/03/05/business/global/05yuan.html
- Xinhua quotation: http://chinadigitaltimes.net/2007/05/cities-in-danger-of-housing-bubble-xinhua/
- The Economist quotation: http://www.economist.com/node/11605123
- US population data: U.S Census Bureau
- US New housing sales data: Bloomberg HSANNHSL
- Japanese population data: Japanese Statistics Bureau
- Japanese Residential Price Index: Japanese Real Estate Institute
- Chinese population data: Chinese National Bureau of Statistics
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