China needs a major real estate reshuffle

January 31, 2012

By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own

China’s real estate sector is hanging in the balance, and a price correction could knock the wind out of the economy. Buyers and sellers are both waiting for the next shoe to drop, judging by abysmal sales over the New Year holiday, and fears abound of a supply glut. But China’s problem isn’t that it has too many homes – just too many expensive ones in the wrong places.

How much housing does China have? Official data is slippery but at the end of 2005, according to the Ministry of Construction, there were 10.8 billion square metres of urban housing. Since then, a net 3.7 billion have been added, according to Credit Suisse. Divide the resulting 14.5 billion square metres by China’s roughly 460 million legal urban residents, and it suggests around 32 square metres per person.

That hardly equates to massive oversupply. True, in 2005 there was just 26 square metres of residential housing per legal city dweller, but GDP per capita has grown 80 percent since then. China still has less space per person than the UK or Japan. Besides, even factoring in economic migrants, only half China’s population lives in cities, and by 2030 around half the existing apartments may face the wrecking ball.

Local bubbles can still grow. In many places, luxury housing is overabundant, and foreigners are now banned from investing in projects that build “villas”. Ordos, in Inner Mongolia, is China’s most famous ghost town. Housing isn’t like other commodities, which can be bought by the tonne and shipped to where there is need. Superfluous mock-Tudor mansions in Chengdu can’t easily solve tower block shortages in Changsha.

A big market readjustment is needed, so that available supply meets desired demand. Up to a point this will happen as developers, starved of cash, cut prices. Private investors who have bought up larger houses may be able to hang on longer. Beijing could help by entering the market, buying up projects through state vehicles and repurposing them for the less well off. China may be destined for a messy redistribution, but it should be able to escape a crash.

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