The topic of Chinese real estate is still occupying many people’s minds and considerations. However most analysis is inconclusive and fails to incorporate the variety of factors which affect pricing. Journalists tend to dodge deeper analysis in favour of proclaiming a bubble based on opinions of other people or the rather crude price-to-income ratio.
That static ratio is useful in developed economies but what’s left forgotten is that ordinary incomes keep rising at a rapid speed in China while a certain group of people already enjoy tremendous wealth. If incomes rise by 10% a year that means they double over a mere seven years. Hence this dynamic has to be incorporated. Wages are bound to increase even higher than in the past because China is finally about to move past the Lewis turning point. In contrast to many other commentators I regard this development as positive as this boosts domestic living standards and consumption. For as long as labour was over-abundant wages were kept in check. Global competition may limit wage growth but there’s more to location of production capacity than the domestic wage level. Factories are more likely to move within China than to another country.
There need to be at least two approaches to valuing Chinese real estate. One is appropriate for central areas such as Chaoyang (Beijing), the other one is useful for outer areas such as Tongzhou (Beijing). Granted, one could come up with many more templates but for the sake of keeping things simple and outlining the principle these two are more than enough.
Here is what I would love someone to do in depth, I’m working on three different papers and don’t have the time to follow on these ideas. For central areas compare their price level with that of other global cities. Why? If you take a cab drive at night most units will seem or be empty. Solid investment opportunities can be hard to find in China and the stock market is wildly fluctuating, real estate appears to be a decent bet. Different time horizons might be one part of the explanation. Investors seem have a longer time-frame in their decision; holding a stake in the regional/financial/political capital is viewed as a good way of putting one’s money to work. If you believe in China’s rise then you might think that Shanghai’s and Beijing’s values should be close to other global cities. The question is when their values should be there. People with cash in China simply seem to be more advanced in their judgment of this question. Romantics would love to see a gradual price increase that is more in alignment with fundamental values but speculation can and does drive prices higher.
Looking at it from another way, would you look at the dividends (rental yield) of a young, promising start-up company if you believed in high capital gains?
The question around this debate revolves is when should Xi’an be valued close to Baltimore, when should Hangzhou be valued close to Munich, when should Guangzhou be valued close to Lisbon? That’s not to say that Chinese real estate prices won’t fall but some dot-coms did bounce back after the tech-bubble burst and proved their value. Chinese real estate may come to resemble Amazon’s (AMZN) stock. Buying in 1999 may simply have been too early.
click to enlarge image
Disclosure: No positions.