Real estate is an important driver of the Chinese economy, which itself is vital for global
growth. However, data limitations make it challenging to evaluate competing claims about the
state of Chinese housing markets. This paper brings new data and analysis to the study of supply
and demand conditions in nearly three dozen major cities. We first document the most accurate
measures of land values, construction costs, and overall house prices. We then create and
investigate a number of supply and demand metrics to see if price growth reasonably can be
interpreted as reflecting local market fundamentals. Key results include the following:
(1) Real house price growth has been high, averaging 10% per annum since 2004. However,
there is substantial heterogeneity across markets, ranging from 3% (Jinan) to 20%
(Beijing). House price growth is driven by rising land values, not by construction costs.
Real land values have risen by over 15% per annum on average. In Beijing, the increase
has been by a remarkable 27.5% per year (or by 1,036%) since 2004.
(2) There is variation about the strong positive trend in house price and land value growth.
Land values fell by nearly one-third at the beginning of the global financial crisis, but
more than fully recovered amidst the 2009-2010 Chinese stimulus. More recent growth
has been much more modest, with some markets beginning to decline. Quantities of land
sales by local governments to private residential developers have dropped sharply over
the past two years. The most recent data show transactions volumes down by half or
more. This should lead to a reduced supply of new housing units in coming years.
(3) Market-level analysis of short- and longer-run changes in supply-demand balances finds
important variation across markets. In the major East region markets of Beijing,
Hangzhou, Shanghai and Shenzhen which have experienced very high rates of real price
growth, we estimate that the growth in households demanding housing units has outpaced
new construction since the turn of the century. However, there are a dozen large markets,
primarily in the interior of the country, in which new housing production has outpaced
household growth by at least 30% and another twelve in which it did so by at least 10%.
Regression results show that a one standard deviation increase in local market housing
inventory is associated with a 0.45 standard deviation lower rate of real house price
growth the following year.
(4) There are no official data on residential vacancy rates in China, but some researchers
have reported very high figures (17%+). We develop a new series at the provincial level
which yields a much lower vacancy rate on average, but it has been rising—from 5% in
2009 to 7.8% in 2014.
(5) The risk of housing even in markets such as Beijing which show no evidence of
oversupply, is best evidenced by price-to-rent ratios. They are well above 50 in the
capital city. Poterba’s (1984) user cost model suggests these levels can be justified only
if owners have sufficiently high expectations of future capital gains. Even a modest one
percentage point drop in expected appreciation (or increase in interest rates) would result
in a drop in prices of about one-third, absent an offsetting increase in rents.