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To housing builders in China: Be careful
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Editor’s note:
Land prices in China have been rising very rapidly; the growth has been as high as 16 percent per annum over eight years. While its not realistic for this rate to continue, don’t expect a slump, says Wharton real estate professor Joseph Gyourko. The following is an edited transcript of the conversation between Knowledge@Wharton and the professor:
Q: You have collaborated with your colleagues on a pioneering project — index of housing and land prices in China. What are some of the most significant takeaways?
A: These are real price indices for land values in China; not housing, but the land underneath the housing. The takeaways are: At a national level, there has been remarkably strong price growth in land values.
We have eight years of data from 2004 through the first half of 2013, and the compound annual growth rate (CAGR) is just over 16 percent per year. There is a lot of variation across regions and cities, however. At the city level, Beijing has been growing astronomically — 22 percent CAGR since 2004.
Q: More on the 16 percent rate of growth, 200 percent over eight years. Do we know how those kinds of price increases compare to housing land price increases in other countries? And what are the factors driving that increase in China?
A: We cannot directly compare them to land prices in other countries, simply because we do not see land value measured consistently in other places.
A couple of comments, though:
One, in an eight-year period, for prices to go up 200 percent is quite extraordinary.
The other thing: If you go to my website and download data, you will see a couple of different periods.
In other words, this 16 percent figure is not a smooth rise.
The first really big increase in aggregate land values in China occurred in 2007. In three quarters, from the first to the third quarter of 2007, real land values in aggregate across the 35 cities we’re tracking rose 71 percent.
Following that dramatic rise, real prices fell 34 percent until the first quarter of 2009.
From 2009 to the end of 2010, prices more than doubled. They went up 108 percent according to our index in real terms. That period coincides with the great Chinese stimulus.
So it is pretty clear there are a number of drivers. Some of this is government-policy related, but some of it is clearly demand-side related.
There is an incredible move from rural areas into urban areas in China, so demand is very strong.
Q: Some developers just go ahead and build without really estimating the real consumer demand. This has led to so-called “ghost cities” that have a lot houses and no residents. Your view?
A: The phenomenon definitely exists. You can see it documented.
But in the 35 markets we covered, there aren’t ghost cities per se.
China has well over 100 cities or urban areas with more than one million people. We’re looking at 35 large ones. So while that phenomenon clearly exists in some parts of China, it tends to be in outlying areas and not in the major markets we’re working in.
Q: Did you find any evidence of a land bubble?
A: I don’t know what a bubble is per se. I don’t believe you can have another eight years of 16 percent per annum growth. Does that mean it’s a bubble? I don’t know.
It means prices are very high. They’re high relative to the incomes of the people buying the housing units that the developers are putting up on these plots of land. You cannot have this rate of growth continuing.
I don’t know whether it’s a bubble. It’s back to my advice to developers and investors. You have to be very cautious.
I think there are some markets where they clearly still make very good sense and others where I’d be really worried about the sustainability.
Q: What impact do you think the economic slowdown that we see these days in China could have on land prices?
A: It’s going to come through both supply and demand.
I’d be more worried about supply effects; that is, developers not cutting back sufficiently on development to accommodate the lower trend growth rate.
I suspect there’s going to still be rural migration into urban areas in China, because the income differences between a factory job and being a farmer are very high, and you’re going to see that movement.
The question is, as the trend growth rate in China slows, will you see development slow enough to accommodate it?
I think the biggest risk will be from oversupply in markets.
And we don’t have good measures of oversupply yet, although that’s something we all need to be thinking about going forward.
Adapted from Knowledge@Wharton. To read the original version, please visit: http://knowledge.wharton.upenn.edu/article/high-land-prices-china-bubble/
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