Is there presently a bubble in the urban residential property market in China? It’d be hard to argue as prices have hardly moved in the last couple of years and are only now showing signs of modest growth.
Have there been bubbles in the past though? Wasn’t the China property market ‘Dubai times 1,000!’ not so long ago [Didn’t Dubai kind of work out? Ed.]? According to work done in the paper I’m highlighting this week by Gregory C. Chow and Linlin Liu of the Princeton and Xiamen Universities respectively the answer is? An emphatic no.
Messers Chow and Liu demonstrate there’s no magic to the rise of Chinese urban residential property prices. It all comes down to one thing; income. In fact, so neatly does it come down to this they calculate an income elasticity of demand of 1.
All past and future talk therefore of Shaanxi Coal Barons swooping on multiple units, men unable to marry without property, multiple family incomes combined to place deposits and etcetera as unique only-in-China explanatory variables can be ignored. There may be some truth, here and there, to the fun stories but the thing that’s going to drive the market in future is income growth; pure and simple.
For investors in the sector the most important point that jumped out to me was if we know where future incomes are headed in China then with a very high degree of certainty we can predict the future trajectory of urban residential property prices; and I don’t believe there’s much chance of the former going down anytime soon, do you?
Happy Sunday
[You can access the paper in full at House Prices in Urban China]