2012-07-15

China housing supply: in surplus?

I've seen many China bulls argue that demand for housing in China is very high and there's actually a shortage of good housing. There is a case for this because much of the old housing is low quality and incomes have risen rapidly. People want to trade up and that helps support demand.

However, every housing bubble was explained as a supply shortage. The article below discusses Australia and rent-seeking organizations, in this case real estate companies that produce research showing the need for more housing. It also mentions the U.S., Spanish and Irish market.

Beware the rent-seeking organisation: don’t be dudded by housing data
The non-existent housing shortage probably comprises the most popular argument used by the bubble deniers to justify astronomical housing prices. As Australia is apparently suffering from a chronic deficit of dwellings, demand is greatly outstripping supply, leading to rising prices.

The problem with this argument is it can’t explain why prices started to rise in 1996 and have skyrocketed onwards, especially during 2001-2004. Annual population growth between 1996 and 2005 registered at approximately 1%, but dwelling growth (adjusted for demolitions and discontinuations) was greater over this period. In fact, 2007 was the first time since 1950 that population growth was higher than dwelling growth. If the housing shortage argument was correct, housing prices should’ve started to rise from 2007 onwards, not 1996.

The shortage argument, however, is not new. Every country that has suffered through a housing boom followed by a crash (a bubble) in recent years have always had its so-called ‘experts’ claim that prices were based upon fundamental valuations due to dwelling shortages.

Take the US as a case study. Leading institutions such as the Federal Reserve, National Association of Realtors, California Building Industry Association and Harvard University’s Joint Center for Housing Studies produced sophisticated studies to show that the $8 trillion housing boom was caused, in part, by dwelling shortages. These studies were authored by professors, PhDs, and businesspeople, all with extensive knowledge and experience but with conflicts of interest that could fill a small book. Yet, their expertise was as illusory as the shortage when the housing market crashed. The same again occurred in Ireland and Spain to the point where these three countries are now bulldozing entire neighborhoods to reduce some of the massive oversupply.
Rapidly rising incomes may make China a special case, but there are now fewer young Chinese as the one-child policy has started kicking in for the 18-22 age cohort. In terms of housing demand, the growing middle class must offset the shrinking youth population. By 2020, the population of 30-year olds will begin declining. Additionally, there is still excess demand in the housing market due to investment demand, which means the growing middle class must pick up that slack as well. If China's real estate market doesn't cool down, investment demand and a shrinking population will lead to a massive supply overhang in a few years, likely before the demographic effects fully kick in.

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