Willie Sutton, a notorious bank robber, is supposed to have said* he robbed banks because ‘that’s where the money is’. Investors in China might respond with something similar if asked why they’ve bought property? With an annual growth rate of 17% in home prices in the same period when the economy grew by 10% per annum the logic is, demonstrably, robust. [*Actually, he didn’t].
The paper highlighted this week is a great companion to one I featured a couple of weeks ago [House Prices In Urban China]. In the earlier paper we learned why Chinese house prices are where they are [Incomes, mostly]; but the paper this week goes a step further and explains two other strange conditions of the Chinese property market. First, why the pace of home price growth should be so much higher than top-line economic growth and second, what accounts for vacancy; somewhere just over 22% in 2013?
This work, sponsored by the Research Division of the Federal Reserve Bank of St. Louis and authored by Kaiji Chen and Yi Wen of the Emory and Tsinghua Universities respectively shows how high returns on capital in the private sector transfer into a desire by entrepreneurs to own property. They highlight a similar phenomena in South Korea in the period from 1985 to 1991 where the economy clocked annual gains of 12.5% but home prices rose by 21.5% per annum. A similar effect is noted also in Taiwan and, more recently, Vietnam.
The empty home effect, they point out usefully, is a demand not supply related phenomena; the argument is proved (in part) by the fact this surplus stock is all bought and paid for. The excess growth rate of prices is a product of an economy in transition where more and yet more entrepreneurs are getting rich. It stops when the economy reaches the Lewis Turning Point [When your surplus labor runs out, more on that at Lewis Turning Point]; which may be sometime between 2020 and 2025 (according to the IMF).
Interestingly, the model breaks down from around 2011 which is about when home prices started to stall due to heavy fiscal intervention by the government. This suggests (to me at least) prices may now be very retarded versus their correct equilibrium level?
There’s more granularity in the paper and if the sector is of interest I’d urge you to review it in full now at The Great Housing Boom of China (don’t let the Charles Parker-esque math intimidate!).
Happy Sunday.