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This is a story of how hidden truth is discovered in China.
Since last month this blog has been following the trail of a report with large implications for the future of China's real estate market. In Part One, we were one of the first English language websites to translate the report by the state power company that over 64.5 million houses lay vacant and idle in China. In Part Two, we published the governments response: The announcement last week that previous reports of empty homes were a "market rumor" with the concurrent release of official statistics on property developers commercial housing square meters awaiting sale.
Today, in part three, we offer an article from Caing.com as a demonstration of the way official information is parsed and sifted within China. As opposed to previous postings, I will limit commentary to this intro. The rest of this post will be a translation of the article itself and any necessary nota benes. Because it is long, and the information is somewhat buried, I have bolded areas of concern to the general reader. Whether you read it all or just the highlights, this article answers why, from an economic standpoint, previous reports on millions of vacant houses may not be simply market rumor.
The following comes from Caing.com [Chinese].
Cao Jian Hai: "How Hard Is It To Calculate a Vacancy Rate?"
There is an urgent need for The National Bureau of Statistics ('NSB) to unite the Ministries of Housing and Land, the Public Security Bureau, and the National Electricity companies to work together and produce a clear report on the residential vacancy rate.
[Background] A few days ago, China's National Statistics Bureau ('NSB') issued a report detailing (since 2005) the amount of property developer's commercial housing square meters awaiting sale.
According to the NSB's statistical data, the end of 2009 had 199 million square meters of commercial housing awaiting sale, a rise of 7.1% year on year. Of this homes comprised 114 million square meters, a 7.8% increase. By July 2010, the total figure awaiting sale was 191 million square meters (a 6.4% increase) with homes accounting for 106 million of this, a 0.2% increase year on year.
Previously there were media reports that over 65.4 million empty houses lay vacant throughout China, enough space to provide housing for over 200 million people. Although the report was quickly denied by concerned parties, conversation about empty houses has quickly become a hot topic. The public's general concern is that the large increase in housing prices is coming from real estate speculation, over-investment, and other unhealthy risk factors. However, determining whether this is true depends on important date on housing vacancy rates. To date, no official has released any authortiative data on these rates which might help us determine whether the public's inference is tenable. Because no official has released any authoritative statistical date. there remains a blank spot in our discussions.
According to the common international defination, "vacancy rate" is calculated by taking the total square meters of empty homes as a percentage of total square meters of all existing homes at a given point in time. In general terms, a vacancy rate of 5-10% for commercial housing is within a reasonable range. Vacancies of 10-20% is within a risk area, while a vacancy rate of over 20% is a serious over-accumulation. From the public's point of view, the NSB publication of square meters awaiting sale is a mere echo to the demands heard on the street that we receive an official vacancy rate number. Regrettable, the NSB has still not released a concrete number of total empty units or a vacancy rate. Instead, in response, the NSB has stated that obtaining a precise vacancy rate must await the release of the National Housing Investigation or on the housing date collected in the National Population Census.
Now, is the recent release of NSB data on square footage awaiting sale enough to clear up everyone's questions? Does China's property market currently have a serious oversupply?
Chinese Academy of Social Sciences Industrial Economics Research Institute researcher Cao Jianhai (曹建海) suggests that following the NSB released rate [sic] of homes awaiting sale, there is an urgent need for The National Bureau of Statistics ('NSB) to unite the Ministries of Housing and Land, the Public Security Bureau, and the National Electricity companies to work together and produce a clear report on the residential vacancy rate."This is a really easy thing. Outside our country [the vacancy rate] is typically calculated by going through the amount of electricity fees received by the electrictiy company*."
[*NB: the original "market rumor" was originally predicated on such methods, specifically a reported news release from the national power company that they had failed to record any electricity charges for a trailing 6 month period in over 64.5 million homes.]
Cao believes that even though the NSB has publically released the numbers on property developers total square meters awaiting sale, such data is still not enough to allow for determination of overall market supply and demand. However, he suggests that once learn the vacancy rate and the number of units awaiting sale, then this action-- providing a vacancy indicator that is more in accord with reality based on the needs of our society -- will have a tremendously beneficial effect on future real estate policy.
Cao Jianhai also goes one step further; he believes China's real estate markets need more than just market regulation; they needs total systematic reform. High ranking members of the Central Party must combine law, property, developers, credit institutions as well as insurance companies to construct an all-inclusive systematice framework. [Society itself must also play a role in publicizing the actual achievements made in the real estate market.]
Cao Jianhai believes that the NSB's recently released figures are only enough to explain the real estate industry's own commercial housing stock [not that of private owners or the government]. While this information might allow one to analyze the property developers current cash flow situation or their pricing strategy for first-tier markets, it does not allow one to judge overall market supply and demand. In Cao Jianhai's opinion, property developers' available total square meters accounts for only 3-5% of society's aggregate housing stock. In order to judge the overall market supply and demand we must await the release of precise statistics on the residential vacancy rate.
In 2005, the NSB's released statistics stating the National Commercial Housing Vacancy Rate had reached 26%. From 2008 on, the NSB did not release such data. Cao Jianhai believes that this was done because "In the past property developers housing awaiting sale was listed as the vacancy rate, but actually this type of industry inventory concept is different from the common international vacancy rate calculation.
This time, the NSB [*} has cleary stipulated: the common method for international residential vacancy rate calculation is to use the square meters available in vacant homes at a given point in time as a ratio of total square meters available. Thus, it is appropriate to use total square meters of commercial housing awaiting sale as a means for calculating overall vacancy rates. This rectifies the previous concept whereby vacancy rates were calculated from the property developers perspective.
[*in this article, the source of the NSB data, the NSB provided guidelines on calculating the vacancy rate and explained how their released numbers on property developers square meters awaiting sale could- conveniently- not be used to do so]
Although the NSB has still yet to offer authoritative vacancy rate figures, Cao Jianhai, believes that the vacancy rate is between 25-30% based on his calculations using investigative media reports as well as reports using the Beijing vacancy rate as a sample. According to Cao's calculations, China has a long-term urban resident population of 620 million. Assuming each of these persons lives in a 30 square meter house, then that means nation-wide there are 18.6 billion square meters available.. Assuming a vacancy rate of 25-30%, this means the area of vacant homes nationwide is between 4.65-5.58 billion square meters. If we assume one home is 80 square meteres, then the entire country has 69.7 million vacant homes and apartment. "This is more than reports of more than 65.4 million idle houses., these numbers absolutely did not come out of nowhere."
Cao Jianhai believs, the vacancy rate indicates that there is serious surplus in China's housing market. There are no shortages. At present, China has a phenomenon whereby speculation and excessive investment is leading to high prices. In today's complicated real estate system, China must not adopt short-term market regulating policies. "Our goverment must formulate policies that last for an entire year's economic run. Only when the economy exhibits signs of a depression should we adopt stimulus measures, and only when we face overheating should we adopt tightening measures.
Cao says we should establish a long term effective mechanism. High ranking members of the Central Party must combine law, property, developers, credit institutions as well as insurance companies to construct an all-inclusive systematice framework. [Society itself must also play a role in publicizing the actual achievements made in the real estate market.]