When middle class can't afford housing
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Shanghai Daily, September 19, 2011
Like the many months before it, July was a gloomy one for the US housing sector.
New results show a 3.5 percent month-on-month fall in existing home sales in July, to 4.67 million from 4.84 million.
Over in the world's other property hot spot - China - a different, but potentially no less perilous, story has been unfolding, according to Joseph Gyourko, director of Wharton's Zell/Lurie Real Estate Center.
In a paper published last year with Yongheng Deng, director of the Institute of Real Estate Studies at the National University of Singapore, and Jing Wu, a visiting research fellow at the institute, Gyourko probed China's rising house prices, which in Beijing, in particular, have been "nothing short of extraordinary."
Since the publication of their paper titled, "Evaluating Conditions in Major Chinese Housing Markets," the three real estate experts have continued to monitor prices in China, while widening their scope beyond the major cities of their initial work.
With their latest findings being prepared, Gyourko spoke with China Knowledge@Wharton about the risks China's property investments face and whether any lessons can be gleaned from the bursting of the US property bubble.
Q: Does the longevity of China's rising property prices play into the argument that the country isn't actually facing a property bubble?
A: It's precisely because prices have been increasing for such a long time that I'm worried. One of the problems in the US was that the good times lasted for a long time - we had a boom from 1996 to 2006-2007- before things really started to crater. China has almost had that long of a period of rise.
The other big worry that I have with China, at least in the big coastal cities, is that middle-income families can no longer afford the typical housing unit. That is a similarity with the US.
It's a clear warning sign and we should have seen it in the US. When a proper middle-class household cannot afford housing because it's simply too expensive relative to their income, that tells you the market is being supported by some sort of speculation. That should worry everyone from Chinese regulators to you and me, because we all need China to grow.
Q: Is the government responding in ways that you agree with?
A: I view it as a healthy sign that the government is willing to try to intervene, to stop what looks like a bubble. I also view it as quite sane and proper for the government to require more equity for purchasers. It's a very good policy and we should have had it in the US. If you really want to bet on this market, you need to put some of your own money in.
Q: For the business community sitting outside China, why should we care about its possible property bubble?
A: It's a big sector, in an economy that's a big driver of global growth. The estimates are that real estate in general is about 12 percent of China's GDP. In the US at the height of the boom, it looked like it was about 6 percent to 7 percent.
There's the potential affect on the real economy to consider. Private housing accounts for around one-third of the buildings completed by China's construction industry. That industry constitutes around 5 percent of the country's GDP and consumes roughly 40 percent of all steel and lumber produced in China.
A lot of people are counting on China's growth to drive our export industries and so on.
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