Beijing's Bubblicious Prices: 27:1 Apartment to Average Income Value

by: Nick Gogerty

Urban China is in the midst of a property bubble that may make a 1630 Dutch tulip look like a bargain.

I am not a China expert, just a guy who seeks the rare sense that gets mislabeled common. I am an Iowa farm style quantitative analyst at heart, keep it simple and tie it to a short, sound story.

Property is a positional good and mostly a commodity. People invest in urban areas, mostly for reduced work commute times and to be around similar people. Over a 400 year study of Dutch property, the values appreciated by effectively 0%.

Property is mostly a positional good only worth the incomes available to support it. Over the last 80 years in the US this relationship worked out to a ratio of 3:1 for median property values to median household income.

Beijing has some truly bubblicious prices for its 17 million citizens. One can argue about economy, different cost of capital etc. but it boils down to the fact that only a given amount of income can support a given amount of apartments at some ratio to price.

Beijing currently has a 27:1 apartment to average income value. according to the Bureau of Statistics of the Beijing Municipality.

This simple ratio analysis applied back in 2007 predicted the $6.6 trillion loss in the US property market as it reverts to the mean 3:1 Median home value to income ratio.

If you adjust the ratios of income to average apartment value in Beijing, it would be similar to having the average apartment in Manhattan priced at around $3.4 million.

For those who think Manhattan is expensive, the average price for an apartment is $840,000. The potential drop in Beijing to a 3:1 ratio would mean a 90% price decline. Determining the social and political implications of such a potential urban real estate scenario are for the real China analysts.