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Building Rome in a day
The sustainability of China’s housing boom
A report from the Economist Intelligence Unit’s Access China service
www.eiu.com
Building Rome in a day
The sustainability of China’s housing boom
Executive summary
C
hina is not facing a major housing bubble, although there could be a short-term mild correction.
The Economist Intelligence Unit’s new models of population and incomes in China’s cities point
to strong underlying demand for housing throughout the next decade. They indicate that housing
demand in China is growing so quickly that a correction in the next couple of years will be short-lived.
At current rates of construction, China can build a city the size of Rome in only two weeks. In the
decade leading up to 2010, China built houses equivalent to roughly twice the total number of houses
currently in Spain or the UK, or about the same number as Japan’s current total housing stock. In per
head terms, the average amount of floor space per urban Chinese person has doubled over the same
period. Chinese floor space per head is already high by international standards, given the country’s
income levels. However, China’s urban population is forecast to continue to grow until 2039. As a
result, rather than pointing to a collapse or a plateau in housing activity in the next decade, growth
rates should remain strong, although they should steadily ease.
Between 2011 and 2020, we expect China’s urban population to increase by 26.1% or over 160m
people, while urban per head disposable incomes will increase by 2.6-fold to Rmb51,310 (about
US$7,500 at current exchange rates). Residential floor space per head in urban areas will increase from
30 sq metres (in 2008) to 41 sq metres by 2020.
China’s housing boom will present opportunities for investors in sectors such as furniture, cars
and building materials. The cumulative value is substantial—using the Chinese fixed asset investment
measure, we expect a total of Rmb75trn to be spent on real estate investment over the decade to 2020.
This equates to US$11.5trn at today’s exchange rate, an amount equivalent to almost five times the
total current annual GDP in the UK.
Continued strong growth in the housing sector over the decade to 2020 will also lead directly and
indirectly to almost 40% growth in demand for steel and similarly strong growth in energy demand,
putting increased pressure on global markets for iron ore and oil.
We do not include a forecast for house prices in this report, but real estate assets in renminbi are
likely to be one of the best-performing global asset classes over the next decade. A combination of
urban population growth, real income growth and exchange-rate appreciation underpin this assertion.
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
China’s love affair with property
S
oaring house prices in Chinese cities have led to widespread concerns over a Dubai-style property
bubble. In an economy that is building as much housing each year as there is in all of Spain (nearly
2bn sq metres), the repercussions of a major collapse would be severe enough to send the world into a
mini-recession and to cause serious damage to resource-focused economies.
Fortunately, such concerns are overblown. Although China’s housing sector is likely to face a
correction in the short term, underlying demand—driven primarily by incomes and urban population
growth—for bigger and better housing is growing so rapidly that such an adjustment would be shortlived. China’s unique demographic circumstances also go some way to explain why demand for housing
has been so explosive. Burst housing bubbles, for example in Japan and the US, occurred in countries
with stable demographics and without strong longer-term growth prospects.
Perhaps Rome cannot be built in a day. But at China’s current rates of construction, it would take
roughly two weeks. It took the Asian hyper-economy roughly a decade to build the equivalent of
China: building Europe in 15 years
(sq m; m)
Newly completed residential floor space (China)
Residential floor space stock, various countries
3,500
3,000
3,000
2,500
2,500
2007
2006
2005
2004
2003
2002
2001
2000
1,500
1999
2,000
2010
3,500
2009
4,000
2008
4,000
1,500
1,000
1,000
500
500
0
0
Czech
Republic
2,000
Sweden
Portugal
Greece
Poland Netherlands Turkey
Spain
UK
Italy
France
Germany
Note. Residential floor space completed in China, 1999-2000 = 17,354m sq m. Existing residential floor space of 12 countries shown = 17,500m sq m.
© The Economist Intelligence Unit Limited 2011
Sources: UNECE; Eurostat; National statistics offices.
Building Rome in a day
The sustainability of China’s housing boom
Europe’s entire housing stock (excluding Turkey), and there are few signs that the seemingly insatiable
appetite of Chinese consumers for bigger and better housing will slow substantially.
Since property markets were liberalised (previously, all property belonged to the state) in the late
1990s, dabbling in real estate has become something of a national sport. The last published large-scale
population survey, conducted in 2005, revealed that 88% of households lived in self-owned housing,
one of the highest such rates in the world.
In per head terms, the average amount of floor space per urban Chinese person has doubled over
the same period. With 41.6bn sq metres of residential floor space in place in 2009, China already has
the world’s largest stock of housing. That may seem unsurprising for a country with 1.3bn people,
but Indian residents, numbering over 1.1bn, enjoy less than one-half of the total living space of their
Chinese counterparts.
In 2010 new residential floor space completed in China reached 1.8bn sq metres, slightly less
than the entire housing stock of Spain. Likewise, it took China approximately 15 years to build the
equivalent of Europe’s entire housing stock.
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
Too much housing?
Selected household indicators, 2010,a
India
China
Russia
UK
Japan
US
44.9
72.6
90.0
66.8
82.3
396,010
53,930
26,140
50,200
115,990
5.3
3.3
2.6
2.4
2.5
2.7
Residential floor space per head (sq metres)
10.5
31.0
–
35.5
33.3
64.6
Personal disposable income (per head, US$)
1,110
1,870
6,050
23,970
26,080
35,970
Urban population (% of total pop)
30.1
Households
223,340
Average no. per household
b
a
Data for some countries are Economist Intelligence Unit estimates.
b
Owing to limited data availability, residential floor space data are for 2000-06, depending on the country.
Source: Economist Intelligence Unit.
What truly stands out, however, is that China’s average living space per head, at just over 30 sq
metres, is extraordinarily high, given the country’s current income levels. The graph below shows the
relationship between GDP per head (PPP) and residential floor space per head. The line represents the
best-fitting curve for the 35 countries depicted.
Countries lying above the curve, such as the US, have relatively high levels of living space per
head, while those below it show the opposite tendency. Japan, for instance, stands out as being a
rich country with relatively small properties. According to the curve, a country at China’s level of GDP
per head (PPP) “ought” to have 20.3 sq metres of living area, which would mean that China is 53%
“overhoused”. By contrast, the US is only 15% overhoused.
Clearly, there are more factors than income that determine living space across countries. Population
density, for instance, plays a prominent role. Japan’s population density is over ten times that of the
US and nearly three times that of China, going some way to explain why Japanese people live in such
small spaces (capsule hotel, anyone?). But even after controlling for population density, China remains
the most overhoused country among the 35 listed.
What are the causes and implications of “overhousing”? This is a difficult question to answer. It
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
Growth and house size
(circle area represents total residential floor space stock)
80
80
70
70
US
Residential floor space per capita (sq m)
60
50
50
Luxembourg
Germany
40
40
30
Japan
China
30
20
20
10
Residential floor space per capita (sq m)
60
10
India
0
0
0
10,000
20,000
30,000
GDP per capita (US$ PPP)
40,000
50,000
60,000
Sources: UNECE; Eurostat; National statistics offices; Economist Intelligence Unit estimates.
could simply be the case that Chinese prefer large apartments to other goods and services. However,
there are also a number of noteworthy characteristics in Chinese society that may account for the
country’s housing exuberance:
l Property sector taxation: The absence of a significant nationwide property tax, such as that enforced
in most other countries, greatly boosts the attractiveness of real estate in China. China has just begun
to experiment with property taxes, but as they are currently at such a low level they are having minimal
impact.
l Small households: The average size of a Chinese household is 3.3 persons (2.8 for urban households),
which is relatively low for a developing country. The one-child policy has clearly played an important
role, but ageing will also contribute to the growth of single households (men tend to die earlier than
women), as will the gender imbalance and changing family values. The number of single-member
households in China increased from 8.3% of total households in 2000 to 10.7% in 2005.
l Gender imbalance: China has the world’s most skewed gender ratio among young people, which
has multiple implications for housing. A small but thorough pool of researchers contend that gender
imbalance, combined with a materialistic approach to marriage, is the reason behind China’s high
household savings rate. A higher ratio of men to women in China means that the latter can be more
selective about their spouses, while the former must try harder. Young men thus save feverishly, often
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
with the help of their parents, to be able to offer their desired partners a suitably impressive home.
l Building quality: While Chinese citizens enjoy living space that is almost on a par with their much
richer Japanese counterparts, the quality of buildings is likely to be on a different level. It is difficult to
obtain objective benchmarks on building quality across countries, but anecdotal evidence from China
certainly suggests lower-quality construction. According to Pan Jiahua, a researcher at the Chinese
Academy of Social Sciences, the average lifespan of a Chinese building is 30 years, compared with 132
years in the UK. “Tofu projects”, as they are known, became the subject of much public consternation
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
China’s construction boom moves inland
following the 2008 Sichuan earthquake. Shoddier construction holds costs down, so it is quite possible
that there is a trade-off between home size and building quality.
Residential floor space per head in 2009
(urban, sq m)
Above 36
33 to 36
30 to 33
27 to 30
24 to 27
Less than 24
No data for ethnic
autonomous prefectures
Source: National Bureau of Statistics.
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
I
n our 2010 report, CHAMPS: China’s fastest-growing cities, we used our demographic and
macroeconomic models covering 287 Chinese cities to show both the broad scope and rapid pace of
growth of Chinese cities over the next ten years. Here we again use our models to answer the question
of what this growth means for China’s housing boom—will it be sustained and where will it occur? We
then show what this boom means for China’s total demand for steel and energy, developments that will
shape global markets over the coming decade.
Within China, there is a huge variation in living space per head between cities, starting at the top
with Dongguan, an export manufacturing boomtown, at 54 sq metres per head, and finishing at the
bottom with Suihua, a freezing rustbelt town, with 18 sq metres.
In general, cities in the north tend to find themselves on the lower end of the living space spectrum,
primarily because colder temperatures make larger houses more costly to heat. Incomes and property
prices clearly play an important role in determining the size of houses, but so does the weather.
Larger cities in China also tend to have less living space per head, which is a trend seen across the
world. Cities such as Beijing, Shanghai and Guangzhou are all below the national average in per-head
floor space, and this is likely to remain the case given their increasingly crowded conditions.
China’s vision of a “well-off society”, as articulated by the Ministry of Construction in 2004, includes a
target of 35 sq metres per head by 2020. Today, that goal looks well within reach. A number of cities have
Cities becoming “well off” in the next decade
(exceeding 35 sq metres per head in living space per head)
Huanggang
Yulin
Shangqiu
Zhoukou
2012
Xiangtan
Lianyungang
Anyang
Zhumadian
Ganzhou
Heze
Zunyi
Xi'an
Zhengzhou
Xuchang
Baotou
Yangzhou
Quanzhou
Linyi
2013
2014
Taizhou
Tianjin
Chongqing
2015
2016
Zhongshan
Xinyang
Jinhua
Jiujiang
Yueyang
Nanning
Nanyang
Foshan
Changsha
Note. Only prefectures with a forecast urban population of over 2m by 2020 are shown.
2017
2018
Huaian
Zhenjiang
Changde
Jiaxing
Xiangyang
Pingdingshan
Liuzhou
Suzhou
Hangzhou
Wuhan
Chengdu
Liaocheng
Jiaozuo
Qujing
Xinxiang
Xianyang
Mianyang
Hohhot
Cangzhou
Changzhou
Wuxi
2019
2020
Dezhou
Nanchong
Huaihua
Shangrao
Shaoxing
Jieyang
Nantong
Hengyang
Luoyang
Weifang
Handan
Nanchang
Kunming
Nanjing
Shijiazhuang
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
Forecast net increase in urbana residential building
Existing residential building stock (various years; m
stock, 2011-2020 (m sq metres)
sq metres)
Chongqing
1,109
Poland
807
Chengdu
447
Greece
494
Zhengzhou
396
Portugal
424
Tianjin
389
Sweden
411
Beijing
350
Czech Republic
369
Xi’an
279
Romania
366
Changsha
272
Switzerland
352
Shanghai
271
Hungary
319
Shenzhen
265
Austria
318
Dongguan
234
Denmark
282
b
a
Figures are for urban areas within referenced prefecture/municipality.
b
Chongqing municipality’s unusually large increase partly reflects its large size compared with other prefectures.
Sources: National Bureau of Statistics (China); UNECE; Economist Intelligence Unit forecasts.
already exceeded the target, and a lot more will do so within the coming decade (see diagram above).
Urbanisation and income growth will act as the main drivers of growth in housing demand. As
incomes rise and ownership of cars escalates, accessibility will become less of an issue and cities will
begin to sprawl, which in turn should drive increases in home sizes as space becomes less scarce.
The table below shows the top ten cities, ranked by the expected net increase in urban residential
building stock for the coming decade. To illustrate the scale of construction, a simple comparison
shows that the expected increase in each of these cities over the ten-year period is equal to the
existing residential floor space stock of a number of European countries.
Regions with high urban populations will still lead construction activity, but a number of lower-tier,
lower-income regions such as Chengdu will grow in prominence. This is primarily because large rural
populations in these regions will provide for strong rates of urbanisation.
Moreover, China is entering a period where economic growth in inland regions is overtaking that of
coastal regions. As manufacturers seek alternatives to the rising costs of labour and land in the Pearl
and Yangtze River deltas, a number of inland cities, including Wuhan, Chongqing, Chengdu and Xi’an,
have been on the receiving end of a series of relocation moves by manufacturers. This is contributing
to faster job and income growth in the region. Coastal provinces, however, are facing a period of
adjustment that will see exports increasingly take a back seat in driving growth.
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
What could go wrong?
C
hina’s relatively large stock of housing per person raises the question of whether building has
already gone too fast and will soon plateau, eliminating real estate as the driver of Chinese growth.
Our models of underlying demand point to a relatively stable, albeit more subdued, long-term outlook.
Risks and the impact of housing on steel and energy
China’s property sector is the main driver of the economic cycle. If residential investment slows in
2011, so will the Chinese GDP growth rate. China’s GDP slowdown in 2008-09 was driven not by the
global financial crisis but by domestic tightening policies in response to overheated property markets.
Outlook for housing construction demand in China,
2011-20
Drivers
Risks
l Urban income growth per head: CAGR forecast at 9.8%
l Policy: Nationwide roll-out of property tax, although government
is likely to introduce policy with caution
l Urban population growth: CAGR forecast at 2%
l Demographics: Falling number of inhabitants per household;
increase in single-member households; gender imbalance
l Rebuilding: Short building life spans imply high rebuild rates
l Rising car ownership will increase available space and restrain
price growth
l Headroom for increase in mortgage-backed buying
l Monetary tightening: Could trigger short-term housing downturn
if administered in a heavy-handed fashion. Only likely if inflation
becomes a serious concern
l Macroeconomic risk: Property remains the key macroeconomic
risk; however, central government finances are relatively healthy
and alternative sources of revenue such as state-owned enterprise
profits could still be tapped
l Current vacancy rates: Emerging gap between housing starts and
sales suggest short-term correction may be overdue
l Relatively low population density suggests per head floor space
will stabilise at relatively high rates
10
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
It is also increasingly important for other global sectors. Chinese demand is crucial for determining
global prices of key commodities ranging from iron ore and oil to aluminium and copper.
Any attempt to assess the impact of China’s ongoing housing boom on global markets by the use
of inputs such as steel and energy in housing construction will result in only a gross underestimation.
As a broad driver of economic activity, housing construction sets off a range of indirect demands for
commodities and energy that are important to measure. For example, housing construction is closely
linked to demand for cars, as new home owners in more affordable satellite towns rely more on cars for
commuting. The resulting increase in demand for cars requires further inputs of steel and energy.
Our detailed econometric models of China enable us to forecast what a given level of housing
activity means for demand for total steel and energy. Over the five years to 2014, as floor space per
capita head rises by 25%, steel demand will rise by 22% and energy demand by around 50%. This will
have a dramatic impact on global markets. The main winners will be countries exporting iron ore and
oil, while consumers everywhere will face relatively higher prices. It is important to bear in mind that
this is not a zero sum game, however—although China will put pressure on global commodity supplies,
it will also be growing as an export market for the rest of the world.
11
© The Economist Intelligence Unit Limited 2011
Building Rome in a day
The sustainability of China’s housing boom
Conclusion
D
espite rapid growth in house prices in China, the real estate market is not a bubble about to
collapse. The government’s tightening measures directed at the property market will, at worst,
lead to a short-lived downturn. Continuing urbanisation and steady growth in incomes will underpin
strong demand for housing, although trend growth rates are likely to slow. The government is now
running trials of a new property tax, but it is not short of revenue and could do without setting off
tax-inspired political discontent. As such, we do not expect a broad property tax at a rate that would
threaten the strong outlook.
China’s ongoing demand for housing has many important implications for business. The global
commodity demand set off by China’s housing industry will continue to underpin commodity prices,
particularly for steel and oil. Our models for forecasting population and incomes in China’s cities show
where, by how much and when the demand for floor space takes off. Hot spots include the rapidly
rising cities away from the coast, largely in central and north-east China.
Within China, the housing industry is associated with broad opportunities in construction, retail
and transport. When viewed at the city level, the opportunities are spread over dozens of lesserknown inland cities and will develop rapidly. Businesses that can quickly and objectively weigh up
opportunities across the hundreds of cities in China will be ahead of the competition.
China does have a high level of per-head floor space given its income levels, but this does not point
to a structural collapse of housing demand. China’s love affair with housing is driven by cultural factors
linked to the gender imbalance, and relatively light taxation of housing as an investment. Neither of
these factors is likely to change significantly this decade.
12
© The Economist Intelligence Unit Limited 2011
While every effort has been taken to verify the accuracy
of this information, The Economist Intelligence Unit
Ltd. cannot accept any responsibility or liability for
reliance by any person on this report or any of the
information, opinions or conclusions set out in this
report.
Cover image - © Hemera/Thinkstock
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