Re-Examining The Chinese Property Market: Deflating Bubble Fears

Oct. 25, 2013 11:43 AM ET6 Comments
Junheng Li profile picture
Junheng Li

Re-Examining the Chinese Property Market: Deflating Bubble Fears

In economics, a so-called bubble is any deviation of an asset's market price from its intrinsic value. Such deviations can be driven by a range of irrationally exuberant and speculative behavior: overly confident views of the future, rampant optimism, bandwagon effects, herd mentality, or a misplaced faith in one genius as an investor. Whether the Chinese property market represents a bubble of epic proportions hinges upon the nature of the demand. Do the country's sky-high property prices reflect genuine, realistic views on the future consumption of housing services? Or are they speculative purchases driven solely by the overconfident expectation that house prices can go nowhere but up?

Since 2000, approximately 70 million apartments have been sold in China - less than 20% of the country's total housing stock, which is estimated at 442 million. The market remains extremely fragmented, although the biggest developers such as Vanke, Poly Real Estate and China Overseas Land and Investment have grown from scratch to $10 billion companies just in the last decade.

"Ghost cities" similar to Weizhou and Ordos continue to crop up in China. However, the Tier 1 cities (China's four most developed metropolises) and Tier 2 cities (10 high-growth cities with smaller economies and population density) that are property developers' major markets continue to grow, driven by consumption demand. Investment-driven purchases have fallen from approximately 50% of all home buys to 10% since the implementation of home purchase restrictions in 2011. Although affordability is always a major complaint in China, developers are addressing the issue by building smaller units for the mass market.

What's commonly misunderstood is the perception of a home in China. Home ownership is perceived as a necessity, not a privilege or luxury. As such, owning a home is more important than owning a big

This article was written by

Junheng Li profile picture
Head of Research at JL Warren Capital LLC, a China focused investigative research firm based in New York and Shanghai, China. Author of Tiger Woman On Wall Street (McGraw Hill, Nov 8, 2013)

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