China’s housing prices are in for continued adjustment, according to Zhu Min, a deputy managing director of the IMF, and the reason for the ongoing downward pressure on the market is one billion square metres of unoccupied buildings.
That means China has enough spare real estate on hand right now to equal 10.8 billion square feet, or enough space to equal 2,380 Shanghai Towers (currently the tallest building in the country) or 4,696 Dallas Cowboys Stadiums.
The US-trained economist and former Deputy Governor of the People’s Bank of China made his prediction at the International Monetary Fund’s spring meeting this month in Washington, where Zhu said that prices for homes were still too high, despite a year long housing slump.
China’s government has loosed a barrage of policy and monetary measures to revive the housing sector in recent months, but the ever-growing backlog of unsold housing projects that were taken on during the most recent boom continues to put downward pressure on the market.
How Much Space is There and Where Did It Come From?
As quoted in Beijing’s China Times, Zhu, who also formerly served as group executive vice president at the Bank of China, did not give a source for his one billion square metre figure, which includes commercial real estate as well as housing. However, his analysis is not too far off from the most recent numbers published by China’s National Bureau of Statistics.
Earlier this month, the Bureau indicated that the amount of “unsold” housing and commercial real estate in China now totalled 650 million square metres, up more than 24 percent from the same period in 2014.
The backlog of unsold space is the product of a stimulus-fueled housing frenzy that saw home prices jumping by double-digits throughout most of 2013, until government concerns over an asset bubble led to tightening of monetary policy and regulations governing housing sales.
The result has been a housing slump that saw home sales for the first quarter of 2015 fall by 9.1 percent compared to the same period last year, just as developers were bringing more projects to market.
Locating That 1 Bil Square Metres and Why It Matters
While Zhu is likely correct about the total amount of unoccupied space in China, and there are ghost districts out there waiting to be covered in media stories, the location of that excess real estate also will have an impact on China’s real estate recovery.
Nomura Securities upgraded its outlook for China home sales this week, predicting that prices in the country’s four tier one cities would rise by 10 percent compared to 2014. However, the brokerage expects prices in other cities to remain flat.
With land in the central parts of cities such as Beijing, Shanghai, Guangzhou and Shenzhen growing increasingly scarce, and price competition for building sites in these first tier cities going beyond the reach of many developers, many of the real estate projects taken on during the most recent boom were built in second tier cities or even smaller communities across China.
“Despite limited demand, many third and fourth-tier cities are laden with huge housing inventories, forming a bubble which may burst, especially in view of the low transaction volume for new houses in these cities” Zhang Dawei, head of research for Hong Kong’s Centaline Property pointed out recently. Some third-tier cities in Jiangsu are said to need as much as 15 years to sell off their backlogs of unsold housing at the current rate of sales.
With these differing supply and demand situations, it seems that China’s smaller cities, particularly places where there is significant oversupply, will continue to face tough times in 2015, while developers resourceful enough to have secured sites in Beijing, Shanghai, Guangzhou or Shenzhen should face a considerably brighter outlook.