China’s Housing Market Much Bigger than Shenzhen and Guangzhou

After news was released that housing prices in Shenzhen andGuangzhou dropped in the first 11 months of 2007, a flurry of articles have been released about the issue.  Some reports, such as this article in the International Herald Tribune, see it as a sign that the entire Chinese housing market is slowing.  But, the article seems to have completely lost track of theChina context.  There is little doubt that after years of rapid growth in South China, the drop of housing prices is important.  But, instead of triggering fears of a housing crisis on the scale of what we are seeing in the US, it is likely just a natural adjustment impacting two markets, Guangzhou and Shenzhen, that have had unsustainable growth in the recent past.  

It’s interesting to note that Shanghai’s average housing sales price dropped substantially in 2005 and then was level for over a year before climbing again in 2007.  This fluctuation / adjustment not only didn’t have a lasting impact on Shanghai’s economy, but it also didn’t  impact housing prices anywhere else in China.  Thus far, the same is holding true for Shenzhen in Guanghzou.  Granted, some small brokerages, affected by lower transaction volumes, are closing down, but thus far, housing prices outside of Shenzhen and Guangzhou have continued to climb.  

One should see dropping or plateauing housing prices in China’s more developed cities as a very good sign.  Despite rising disposable incomes, many middle and lower income earners cannot afford to buy homes, which is leading to widespread public discontent and heavy handed government regulations.  It’s also critical that people not lose sight of how incredibly large and diverse China’s residential market is.  Whereas in Beijing we have apartments selling for over RMB 60,000 per sqm and Shanghai has units selling for over RMB 100,000 per sqm, the highest end units in Shenyang typically sell for RMB 6,000 to 8,000.  In Baodi, a city halfway between Beijing and Tianjin, brand new apartments sell for RMB 3,000 per sqm.    The price growth everywhere is substantial, but the vast majority of Chinese residential markets are just emerging, putting them at a drastically different point in the growth cycle than one sees in Shenzhen and Guangzhou.  

Lastly, there are several factors that suggest that China’s residential markets have decades of growth ahead of them.  The first is urbanization, which is both rampant and encouraged by the government.  The second is rising disposable incomes – the fundamental driver behind the widespread Chinese desire to improve living and conditions.  And, the third is a continued lack of investment opportunities for wealthy Chinese.  This last factor, combined with the fact that growth in the Chinese stock market is bound to slow down before too long, means that small-time investors will continue to look for opportunities in the residential market.  

One impact of the recent price drops in Shenzhen and Guangzhou is that some purchasers are now taking a wait-and-see approach in other cities, especially Beijing where some expect that prices will drop post-Olympics.  But, instead of being seen as heralding a Chinese housing crisis, purchasers actually taking the time to fully evaluate and question property investments is a healthy and important change.

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