Contradictory figures fuelling China property bubble debate

Chatter about a bubble in China's property market has risen to deafening volumes lately.

Since the authorities released numbers last week showing that home prices in major cities climbed 15 per cent or more over the 12 months to August, a whole tribe of bears has emerged from the woods to warn that the Chinese property market is being propelled by an unsustainable speculative frenzy and is now primed for a devastating collapse.

Nonsense, retort the bulls. The market is propelled by healthy demand, and anyway, prices eased last month compared with July.

As always, making out the true picture is tricky.

The classic bubble argument goes something like this: China's new middle classes are keen savers. But deposit rates are barely positive in real, inflation-adjusted terms. And the stock market is down more than 60 per cent from its 2007 high.

That only leaves housing as a trusted store of wealth. As a result, buyers have piled into property, purchasing multiple flats in new developments with their newly earned cash.

As buying pressure pushed prices higher, the market acquired a momentum of its own. Developers and local governments built new homes by the million, and everyone who could raise the money - students, young couples, grannies - snapped up as many as they could in the confident expectation of making handsome capital gains in a permanently climbing market.

The authorities have attempted to cool things, imposing restrictions on multiple purchases and requiring hefty down payments. But the persistence of price rises demonstrates how easy speculators have found it to evade official controls.

The consequence today is that the price of a new home has soared far beyond the means of the average first-time buyer. Meanwhile, millions of brand-new apartments sit empty in uninhabited ghost cities, all-too-visible symptoms of China's speculative excess.

Bulls counter that the demand is real. The vast majority of buyers, they insist, are purchasing flats to live in, not as investments. Most families own just one, and many paid cash, so leverage is low.

Sure, there is the odd pocket of overbuilding. Ordos in Inner Mongolia is everyone's favourite example. But given the pace of urbanisation and rate at which China is creating new wealth, few developments remain empty for long. New towns that a year or two ago were condemned as ghost cities are thriving communities today.

It should be easy enough to work out which view is nearer the mark. The answer hinges on how much new housing has been built in recent years.

Let's accept that China's urban population has more than doubled since 1995 from 350 million to 710 million. With an average household size of three, the growth of the urban population over the past 17 years would imply demand for at least 120 million new homes.

If we also accept that the average new home boasts a floor area of 100 square metres - generous by Hong Kong standards - then we can conclude that since 1995, there has been demand for 12 billion square metres of new housing.

If China has built much less than that, then prices are rising in response to genuine demand. But if new construction exceeds 12 billion square metres by a wide margin, then it's likely the market is a bubble.

Unfortunately, official figures don't settle the debate. The National Bureau of Statistics publishes three data series for completed residential floor space.

The most widely followed is for residential "commodity buildings" and shows that China has built less than 7 billion square metres of new housing since 1995, which would imply a severe shortage of new housing and indicate that the bulls are right.

A second series, compiled from provincial data for residential construction, indicates that about 16 billion square metres of new housing have been constructed since 1996, which suggests supply and demand are more or less evenly balanced.

However, there is a also a third data series, covering "whole country" residential construction. According to this set of figures, since 1995 China has built an enormous 26 billion square metres of new housing.

That's more than enough to house the country's entire population in accommodation considerably more spacious than most Hongkongers inhabit.

Clearly, if this last figure is correct, then China's housing market is suffering enormous oversupply, and is long overdue for a deep correction in prices.

Alas, it's impossible to say for sure which data set is closest to the truth.

But the most likely answer is that although there are certainly local examples of massive overinvestment, and while prices in many cities are too high for many residents to afford, the overall supply of new housing is not too far out of kilter with underlying demand.

Talk of a giant nationwide bubble looks over-inflated.

tom.holland@scmp.com