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Why Roubini may be wrong on China’s property doom
By Sun Yu of FT China Confidential
If China is on course for a hard landing after 2013, as Nouriel Roubini of New York University is predicting, a key driver could be the country’s vast number of empty apartments. It’s become the symbol of over investment that Beijing is struggling to tame. Earlier this year, Yi Xianrong from the Chinese Academy of Social Sciences put the figure at 64.5m − enough to house a third of China’s urban population.
The estimate, along with the bearish scenario, appears to overstate the problem, according to a China Confidential survey in seven provinces which counts vacant new homes at around 13m . While this is still a huge number, it could ease over time as rural to urban migration fills up the empty flats.
The large number of empty – but sold – apartments is driven not only by speculation, in which people buy a home in the hope of selling it six months later for a 30 per cent profit, but also by a combination of rapid urbanisation and soaring inflation that makes multiple homeowners better off in the long run.
In many lower-tier cities, the housing market started to take off when local governments began building satellite cities to host new businesses downtowns could not absorb. Well-off locals would buy a second home so they could rent it out to migrants from other parts of the country.
The idea works under a relatively low home price to rent ratio, which applies to most small cities. In Xuchang, of Henan Province, a condo worth Rmb140,000 costs Rmb950 to rent per month. This translates into an annual return of eight per cent, compared with a three per cent bank deposit rate.
Yet in most big cities, where surging home prices have made rental income negligible, people buy multiple homes as a long-term investment to guard against inflation and other business risks.
At Guangzhou’s Jiayu Junyue, a residential complex in the newly developed central business district which was sold off in 2007, 57 per cent of the 167 flats were empty, according to China Confidential’s March survey. An Rmb 5m condo at Jiayu Junyue costs Rmb40,000 a year to rent, implying a return of 0.8 per cent. Local property agents said buyers, mostly small business owners, are prepared to wait 10 years for the area to prosper.
With this in mind, China’s wealthy continue their buying spree of new homes they may never move into. According to the survey, vacancy rates average 20 per cent for residential properties completed within the past five years, and could reach 60 – 90 per cent at luxury homes and suburban apartments.
This combined put the total number of empty homes at 13m, or 20 per cent of outstanding residential properties built since 1985, according to China Confidential estimates.
The number, however, could fall as thriving local economies, driven by the inland push of coastal manufacturers, boosts income and brings in migrants.
The population in Kangbashi, one of the best known ghost towns that belongs to Inner Mongolia’s Ordos city, rose to 50,000 from 28,000 last year, after a number of manufacturers moved in with thousands of workers. Although this does not make the area, which is expected to house 1m people, much busier than at the time of our previous survey in 2009, local businesses are seeing signs of green shoots following many months of struggling.
The civil affairs bureau of Kangbashi, for example, granted 183 marriage licenses last year, up from 51 in 2009. Rents in the downtown area also doubled to Rmb 200,000 from a year earlier as more people moved in.
Worries, however, remain as to whether the inland push of manufacturing capacity could create enough demand before the empty flats spiral out of control. The introduction of Huatai Auto to Kangbashi, for example, could take longer to yield a return because of a lack of local suppliers. In the meantime, the city government has borrowed so much that it wasn’t able to pay local vendors on time for construction work.
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