China doesn’t have a housing bubble. Here’s why
- China needs a large and vibrant real-estate sector to build enough housing in its big cities to meet the urbanisation demand in the next 10-20 years
- Its high levels of savings and investment should also be seen as a blessing, especially given the costly necessary transition to clean energy
Per capita living space in large Chinese cities is small and new housing supply is well short of demand from young people wishing to live in these cities. Every year, millions of university graduates move into major cities to work, but struggle to afford housing. Moreover, there are hundreds of millions of migrant workers, most of whom can only afford to live in dormitory-type housing.
Over the next 20 years that would mean roughly 15 million people potentially moving into cities every year, with each person requiring US$200,000 of investment in housing and urban infrastructure on average, which works out to US$3 trillion a year, or 20 per cent of China’s current gross domestic product.
So, China’s problem is not that it’s real-estate sector is too big. On the contrary, China still needs a large and vibrant property sector that can build enough housing in its large cities to meet the demands of urbanisation.
That said, there are housing gluts in certain regions, especially in lower-tier cities, but prices there are only a fraction of those in large cities. Overall, China has a geographical mismatch of housing demand and supply; too much housing in less-developed areas, but also an acute shortage in large cities where people want to work and raise families.
So, the best policy is to rapidly increase housing supply in high-priced areas. In the past, officials in charge of land supply did not follow price signals, and housing supply in large cities did not increase nearly as fast as in less-developed areas. This supply-demand mismatch has exacerbated the shortages in large cities, causing prices to rise quickly.
Thus, the correct policy prescription for the Chinese government is to increase housing supply in these large cities. It certainly has the ability to do so, since it owns the land and can build very efficiently.
There are still arcane zoning laws in some major cities; in Shanghai, for example, a third of the land is reserved for farming.
Global investment in clean energy needs to increase by an estimated US$131 trillion by 2050 to avert catastrophic climate damage; every country would need to spend 5-10 per cent of its GDP on average to meet this. One can argue that China, with its high savings rate, is in a much better position to afford this massive investment than countries with low savings rates.
But that is 20 years from now. Until then, China still needs large real-estate investment in big cities. High rates of savings and investment, particularly in real estate, are not weaknesses but instead serve as potential, and are an opportunity for fast growth – but only if the government can clear the land supply bottlenecks in large cities.
James Liang is an economist and entrepreneur. He is the co-founder and executive chairman of Trip.com Group, and a research professor of economics at Peking University’s Guanghua School of Management