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It is an undoubted factor that average house prices in urban China are overly high despite real estate developers are making every
effort to propagate a real spring in the housing market coming soon.
When a stock bubble was created in China in 2006 to 2007, the housing
market was also expanded at a non-rational pace. Stock market bubble was
eventually busted in 2008. It is certain that housing bubble must also
be busted before seeing a stabilization. The question is how
big a drop the average urban house price will suffer. Let's look at the
housing situation in China.
New housing projects continue to fill in the market
Today, newly completed apartment complexes are pouring into the housing
market one after another in Beijing. In April alone, there will be 10
large scale subdivisions joining market competition in addition to 10
each released in March and February. It is projected that over 100 new
residential building projects will be unveiled in "2009 Beijing Spring
Real Estate Trade Fair". All those collectively will push up the housing
inventory to an unsustainable level during a broad economic downturn.
Consequently, a severe housing market correction is unavoidable in the
near future.
Total unoccupied housing units reached 10 million square
meters in Beijing
According to the statistic data released by Beijing Social Science
Institute, high house prices and week market market demands have caused
the total unoccupied housing units to reach 10.44 million square meters.
This is a very dismal situation. Future outlook of the housing market in
China can not be optimistic.
It is a consensus among economic experts in China that a reasonable
ratio between the average housing price and the average actual annual
household income should fall between 3:1 to 6:1. The average household
income in Beijing was 65967 yuan in 2007. However, the average
house price reached 15162 yuan by the end of 2007. Assuming the average
house has an area of 100 square meters, the "house price" to "household
income" ratio was 23:1, far exceeding a healthy range between 3:1 and
6:1. With this staggering ratio in place, the fundamental reason for
extreme weaknesses in the housing market is obvious.
Moreover, nearly 50,000 government subsidized housing units, with a
total construction area of 2 million square meters, are expected
to enter the market by the end of 2009. Inevitably this will have great
yet adverse impacts on house prices in Beijing. It is predictable that a
real correction or even a collapse in the housing market will start in
2010.
Nationwide house inventories approach 250 million square meters
It is apparent that it will take a long time and great efforts to move
these accumulated inventories. But that is not it. Recent government
released data indicate the total undeveloped land held in the hand of
real estate developers is around 360 million Ha. In order to
effectively digest such excessive inventories, 800 million square meters
of housing units must be constructed each year based on the current
development pace. This will further escalate already serious inventory
problems of the completed houses.
Average house price is most likely to drop 40-50%
Real estate situation in Beijing is indicative of China's overall
housing market. In order for "house price to household income ratio" to
move to a sustainable level so the escalating house inventory problems
can be contained, house prices must drop 40-50% within next 2-3 years,
even when taking a double digit personal income growth into
consideration. If actual income growth is not as optimistic as assumed,
the drop will be even sharper.
On the other hand, it is unlikely for government to come up with further
stimulus plans to help the endangered housing market. In fact, the
government has taken numerous measures to stabilize the housing market
since last year but results are well below expectations. We must admit,
if a bubble has formed in a market, it must be completely busted
first before any market recovery can be seen. Real estate developers
must rescue themselves, while the only way for them to step out ever
increasing financial difficulties is slashing prices to improve cash
flow and balance sheets. |
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