Joseph Gyourko on Housing Market Risk in China
Brown Bag Discussion Series
Thanks to Joseph Gyourko for leading a recent brown bag discussion on risk in China’s housing markets. You can find his slides here. Using his own land price index, Gyourko is able to provide insights that are not readily available in officially provided data.
Gyourko sees substantial annual growth in land values across 35 cities located in the East, Middle, and West regions of China, though he also observes substantial variation among cities. For example, land values in Beijing experienced an annualized growth rate of 24.7% between 2004 and 2013 while the annualized growth rate for Dalian was just 7.7% over the same period. Not surprisingly, the growth in land values has led to similar run ups in housing values (Gyourko points out that construction costs grew slowly over the period he examined and therefore land must be driving housing price growth.)
In terms of housing market fundamentals, Gyourko points out that demand growth is very strong due to rapid urbanization. He also finds that, on average, the expansion of urban land supply has kept pace with demand. But here again, there is considerable variance among cities. In cities such as Beijing, Guangzhou, and Shanghai supply is not keeping pace with demand. In cities such as Chengdu and Chongqing, supply is outpacing demand.
While the data does not allow Gyourko to say whether there is a bubble in China’s housing market, he does draw several interesting conclusions:
One: Housing supply has begun to outpace demand in some markets, mostly in China’s interior cities.
Two: Markets are riskier due to slowing transactions volumes with high levels of unsold inventory relative to typical sales volume. Observers should be particularly concerned about slowing transactions volumes in interior cities.
Three: There is no evidence to suggest that housing in expensive eastern markets such as Beijing or Shanghai is mispriced. That said, these markets are clearly risky because high price-to-rent ratios imply aggressive expectations of continued price appreciation. What’s more, Gyourko points out that recent extraordinary growth in land values in these markets cannot continue apace.
Four: Finally, state imposed constraints on investment and savings choices in China mean that many view housing as a store of value, rather than an expensive to maintain durable good with consumption features. This lack of options may be distorting housing values.